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CORPORATEGOVERNANCE ANDSECURITIES LAWSA Public Company Handbook

Curtis, Mallet-Prevost, Colt & Mosle LLPLawrence GoodmanValarie A. HingJeffrey N. Ostrager

Copyright © 2010 Curtis, Mallet-Prevost, Colt & Mosle LLP(No claim to original U.S. Government works)

All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted in any form or by any means, electronic, mechanical, photocopying,recording, or otherwise, without the prior written permission of the author and publisher.

This publication is designed to provide accurate and authoritative information in regard tothe subject matter covered. It is provided with the understanding that this publication doesnot constitute legal, accounting, or other professional advice. If legal advice or other expertassistance is required, the services of a professional should be sought.

Printed in the United States of America.

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ABOUT THIS HANDBOOK

This handbook is intended to serve as a general reference guide for public companyofficers and directors on key securities law and corporate governance requirementsapplicable to public companies. Although this handbook reviews the criticalrequirements of the areas covered, our coverage of these areas is not exhaustive and isnecessarily incomplete. In addition, many of these areas may be subject to changes instatutory and case law as well as new interpretive positions of the Securities andExchange Commission or stock exchanges.

Although this handbook may provide information concerning potential legal issues, itis not a substitute for legal advice from qualified counsel. This handbook is not createdor designed to address the unique facts or circumstances that may arise in any specificinstance, and you should not and are not authorized to rely on it as a source of legaladvice. This handbook does not create any attorney-client relationship between youand Curtis, Mallet-Prevost, Colt & Mosle LLP.

The opinions expressed in this publication are those of the individual authors andcontributors and do not necessarily reflect the views of Curtis, Mallet-Prevost, Colt &Mosle LLP.

ABOUT THE AUTHORS

The authors are partners in the Public Company and Corporate Governance PracticeGroup at Curtis, Mallet-Prevost, Colt & Mosle LLP. The following Curtis lawyerswere instrumental in the preparation of this handbook: Karen R. Brice, Stefano deStefano, Ryan Hansen, Joshua Holt, John D. Nielsen, Danny Phillips, Sara Sherrod,Alex Siegal, Andrew Smith, Brendan Snowden and Jeanine Turell. The authors thankthem for their invaluable assistance.

ABOUT CURTIS, MALLET-PREVOST, COLT & MOSLE LLP

About Curtis

Founded in 1830, Curtis, Mallet-Prevost, Colt & Mosle LLP is an international lawfirm headquartered in New York. Curtis provides a full range of legal services toclients that include publicly traded and privately owned multinational companies,international financial institutions, governments and state-owned entities, andhigh-net-worth individuals. Curtis’ core practices of Corporate Law, Litigation andArbitration, Restructuring and Insolvency, and Tax are complemented by variousspecialty practice areas, including Environmental, Intellectual Property, International

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Trade, Maritime, Real Estate, and Trusts & Estates. With 13 offices in the UnitedStates, Latin America, Europe, the Middle East and Asia, we are located in the keybusiness centers in which our clients need us most.

Curtis prides itself on providing more than just high-quality legal counsel. Our lawyerswork to forge strong business partnerships with our clients. In addition, our knowledgeof the commercial and strategic aspects of our clients’ industry sectors provides uswith a clear understanding of each matter’s particular economic drivers, risks andopportunities. Clients value our ability to offer creative, sophisticated, yet pragmaticsolutions to their many challenges. Our client teams, led by a relationship partner, aremade up of lawyers who collectively have the requisite skill set and experience to meetthe client’s needs. Matters are staffed efficiently and cost-effectively with teamscomprised of both senior and junior lawyers who leverage the firm’s collectivecapabilities and international platform, while deploying the most current and securecommunications technology. Clients receive updates on legal developments in avariety of ways, including in-house seminars, client alerts and blogs.

Our culture emphasizes respectful and constructive collaboration and communicationnot only with our clients, but also with counterparties and their advisors. Curtislawyers strive to ensure the success of complex, fast-moving transactions and high-stakes disputes that typify today’s global business environment. For almost 180 years,our dedication and commitment has earned us the confidence and trust of our clients,many of which have been turning to the firm for advice for decades.

Public Company and Corporate Governance

The Curtis Public Company and Corporate Governance practice is dedicated toadvising our public company clients on securities regulatory and stock exchangecompliance matters, as well as all aspects of corporate governance.

The range of services provided by the group includes:

• Preparation of periodic reports under the Securities Exchange Act of 1934;

• Preparation of registration statements and proxy and information statementsin connection with acquisitions, spin-offs and business combinations;

• Directors’ fiduciary duties and directors’ and officers’ responsibilities underthe securities laws, including advising special committees;

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• Board governance “best practices,” including proxy advisory firm andinstitutional shareholder policies;

• Board committee matters, including committee composition, committeecharters and responsibilities;

• Codes of business conduct and ethics and related party transactions policies;

• Risk management programs;

• Shareholders’ meetings and compliance with the proxy requirements underthe Securities Exchange Act of 1934;

• Design of compensation plans and programs, including governance andinstitutional shareholder considerations;

• Compliance programs, including insider trading compliance and Section 16compliance;

• Issuer repurchase programs;

• Disclosure policies, including compliance with Regulation FD andRegulation G;

• Sarbanes-Oxley Act compliance, including disclosure controls andprocedures and internal control over financial reporting; and

• Registered and unregistered issuances of securities.

The Curtis Public Company and Corporate Governance practice is supported by ourfirm’s complementary practices in the areas of Capital Markets, Finance, Tax, Mergersand Acquisitions, Executive Compensation, Intellectual Property, Environmental Law,and Litigation. In addition, the Public Company and Corporate Governance teamworks with lawyers from our international offices to provide counsel on the regulatoryand compliance aspects of cross-border transactions. In keeping with the firm’sinternational focus, our Public Company and Corporate Governance practice group hassubstantial expertise in representing foreign private issuers whose shares trade in theform of ADRs.

Criminal Defense and Government Investigations

Attorneys in the Curtis Criminal Defense and Government Investigations grouprepresent clients in criminal and civil investigations and enforcement actions by

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federal and state prosecutors and regulators. Our clients include public companies,hedge funds, private equity firms, accounting firms, broker-dealer firms, publicofficials, executives and other individuals in investigations of possible accountingfraud, securities fraud, bribery, perjury and false statements, tax fraud, antitrustviolations, healthcare fraud, false claims, FDA violations, immigration fraud andenvironmental crimes.

The Curtis Criminal Defense and Government Investigations practice, which is basedin New York and Washington, D.C., serves clients in venues throughout the UnitedStates. With a group of attorneys that includes several former prosecutors andregulators, Curtis brings decades of experience to its defense of clients facinggovernment probes or enforcement actions.

The Criminal Defense and Government Investigations practice has extensiveexperience representing clients in investigations and proceedings conducted by theDepartment of Justice, state attorneys general, SEC, Financial Industry RegulatoryAuthority (FINRA), Commodity Futures Trading Commission (CFTC), stateaccountancy boards, and other agencies and has a proven track record of conductingthorough investigations, whatever the business situation.

Securities Litigation

The Curtis Securities Litigation practice represents clients in the defense of complexcases in both federal and state court. Our clients include domestic and internationalcorporations, investment banks, hedge funds and other financial institutions, as well asaccounting firms, law firms and individuals. The range of services provided by thegroup includes:

• Defense of securities class action lawsuits;

• Defense of shareholder derivative lawsuits; and

• Defense of actions against issuers and underwriters of securities.

Our Securities Litigation practice is based in our New York and Washington, D.C.offices, and brings a sophisticated understanding of securities markets to mattersacross the country. Best known for their trial skills, Curtis litigators also recognize theneed for early and favorable resolutions, and have a track record of successfullyobtaining dismissals, summary judgments and denials of class certification on behalfof their clients. Familiarity with the leading firms of the plaintiffs’ bar provides our

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lawyers a strong grasp of the strategies and tactics of plaintiff’s counsel and allowsthem to negotiate settlements from a position of strength. The group also works closelywith the firm’s Criminal Defense and Government Investigations group in therepresentation of clients under investigation for violations of the securities laws.

The Securities Litigation group frequently draws upon the industry experience andinsights of our Public Company and Corporate Governance practice group to developcomprehensive strategies that address all the legal and factual aspects of eachsecurities-related matter.

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About RR Donnelley Financial Services Group

As the world’s largest provider of integrated communications, RR Donnelleysuccessfully leverages our global platform, industry leading service organization andenduring financial stability to help our clients achieve their goals.

With over 146 years of experience, RR Donnelley works collaboratively withthousands of clients worldwide to provide a range of solutions to address all of theirbusiness communications needs.

Our unparalleled print capacity, innovative technologies and deep industry expertisemake RR Donnelley the partner of choice for corporations and their advisers.

• Compliance and EDGAR® filings

• Notice and Access

• XBRL translation and rendering services

• Judgment-dependent outsourcing services

• Global financial and commercial printing

• Self-service filing solution

• Single-source composition services

• Translations and multilingual communications

• Virtual data room services

• Enhanced digital output

RR Donnelley is a reliable single-source solution for all of your businesscommunication needs. As a Fortune 250 company, we are eager to put our strength,scale and expertise at your disposal. To learn more, please visitwww.financial.rrd.com.

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CORPORATE GOVERNANCE AND SECURITIES LAWS

TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

The Dodd-Frank Wall Street Reform and Consumer Protection Act . . . . . . . . . . . . . . . 1SEC Implementation Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Shareholder Approval of Executive Compensation (“Say-on-Pay”) . . . . . . . . . . . . . . . . . 3Recent Development – Proposed Rules Implementing the Say-on-Pay Provisions of the

Dodd-Frank Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Proxy Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Compensation Committee Independence and Authority to Retain Advisors . . . . . . . . . . . 11Compensation Consultants and Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Executive Compensation Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Incentive Compensation Clawback Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Director and Employee Hedging Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Board Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Whistleblower Incentives and Protections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Foreign Audit Work Papers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Broker Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24SOX Reporting Requirements for Smaller Reporting Companies and Non-accelerated

Filers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25New Conflict Minerals, Mine Safety and Extractive Industries Disclosures . . . . . . . . . . . 25Filing Deadlines for Schedule 13D and Form 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Periodic and Current Reporting Under the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 28Reporting Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Categories of Public Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Asset-Backed Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Filing Deadlines; Failure to Timely File a Required Report . . . . . . . . . . . . . . . . . . . . . . . 33Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Form 10-Q . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Confidential Treatment Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Proxy Statement and Annual Report Disclosures and Process . . . . . . . . . . . . . . . . . . . . 60Overview of Annual Proxy Statement Disclosure Requirements . . . . . . . . . . . . . . . . . . . 60Summary of Selected Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Executive and Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Related Person Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Recent Development – New SEC Rule Amendments to Proxy Disclosures . . . . . . . . . . .Recent Development – Final Proxy Access Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

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Annual Meetings – The Solicitation and Voting Process . . . . . . . . . . . . . . . . . . . . . . . . . 76Annual Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Broker Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Recent Development – NYSE Rule 452 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regulation of Analyst Communications and Other Voluntary Disclosures . . . . . . . . . 80The Pre-Regulation FD Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Regulation FD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

What Disclosure is Covered by Regulation FD? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82Communications Excluded from Regulation FD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Timing of Public Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Satisfying the Public Disclosure Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84What is Material Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85The Consequences of Violating Regulation FD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86Public and Nonpublic Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87The Importance of Compliance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Regulation G and Related Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90What are Non-GAAP Financial Measures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92What Types of Disclosures Does Regulation G Cover? . . . . . . . . . . . . . . . . . . . . . . . 92Non-GAAP Measures in SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93The Consequences of Violating Regulation G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Amendments to Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

The Sarbanes-Oxley Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Audit Committee Standards and Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Listed Company Audit Committee Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Audit Committee Financial Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Management Accountability for the Quality and Accuracy of Financial Reporting andOther Public Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103Disclosure Controls and Procedures and Internal Controls Over Financial

Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103Section 302 Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107Section 906 Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107Prohibition Against Improper Influence on Company Audits . . . . . . . . . . . . . . . . . . . 108Forfeiture of Certain Bonuses and Profits Following Accounting Restatements . . . . 109

Addressing Potential Conflicts of Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Prohibition on Loans to Directors or Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Regulation BTR – Blackout Trading Restriction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112Accelerated Reporting by Section 16 Insiders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Auditor Oversight and Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113PCAOB Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113Auditor Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

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Enhanced Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Off-Balance Sheet Transactions and Contractual Obligations . . . . . . . . . . . . . . . . . . . 118Conditions for Use of Non-GAAP Financial Measures . . . . . . . . . . . . . . . . . . . . . . . . 120Real-Time Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Whistleblower Protections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121Attorney Reporting and Related Conduct Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Form of Section 302 Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Stock Exchange Listing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125NYSE Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Shareholder Approval of Corporate Action; Shareholder Meetings . . . . . . . . . . . . . . 132Review of Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135Public Disclosure and NYSE Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

NASDAQ Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Exemption for Foreign Private Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144Communications and Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Trading in Issuer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148Trading on the Basis of Material Nonpublic Information . . . . . . . . . . . . . . . . . . . . . . . . 148

What is Material Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148Insider Trading Policies and Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149Trading Windows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15010b5-1 Plans and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Resales of Restricted and Control Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153Sales of Restricted Shares Outside of Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

Issuer Stock Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156Rule 10b-18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157Key Considerations Prior to Initiating Stock Repurchase Programs . . . . . . . . . . . . . . 159

Ownership and Trading Reports by Management and Large Shareholders . . . . . . . . 160Sections 13(d) and (g) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Schedule 13D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164Schedule 13G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166Violations of Sections 13(d) or (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Section 16 of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172Section 16(a): Reporting Transactions by Insiders . . . . . . . . . . . . . . . . . . . . . . . . . . . 175Section 16(b): Liability for “Short-Swing” Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . 181Section 16(c): Prohibition of Short Sales by Insiders . . . . . . . . . . . . . . . . . . . . . . . . . 184

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Foreign Private Issuer Reporting and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185Determining Foreign Private Issuer Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185Exchange Act Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186Exchange Act Reporting and Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

Annual Report on Form 20-F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187Current Reports on Form 6-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Beneficial Ownership Reporting on Schedules 13D or 13G . . . . . . . . . . . . . . . . . . . . 190

Sarbanes-Oxley Act Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190Enhanced Audit Committee Standards and Audit Protections . . . . . . . . . . . . . . . . . . . 191Management Certifications, Evaluations and Reports . . . . . . . . . . . . . . . . . . . . . . . . . 192Financial Restrictions Applicable to Company Insiders . . . . . . . . . . . . . . . . . . . . . . . 193Enhanced Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

Key Accommodations for Foreign Private Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201Foreign Private Issuer Deregistration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Rule 12g3-2(b) Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204Publish Material Disclosure Documents in English . . . . . . . . . . . . . . . . . . . . . . . . . . . 205Maintain Foreign Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206No Exchange Act Reporting Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

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INTRODUCTION

Public companies are subject to an extensive and complex regulatory regimeunder the U.S. federal securities laws and stock exchange listing rules. This handbookprovides an overview of the securities law and stock exchange reporting, disclosureand corporate governance requirements applicable to public companies and theirofficers, directors and large shareholders. Throughout this handbook, we use the terms“public company” and “issuer” interchangeably.

In addition to outlining the applicable laws, regulations and rules, this handbookseeks to provide practical guidance reflecting, among other things, interpretiveguidance issued by the Securities and Exchange Commission, general industry practiceand the authors’ experience.

The past year witnessed significant legislative and regulatory developmentsaffecting the obligations of public companies under the U.S. federal securities laws.Most notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act(referred to in this text as the “Dodd-Frank Act”) was signed into law by PresidentObama on July 21, 2010. While much of the Dodd-Frank Act is concerned specificallywith the banking sector and derivatives markets, it also contains significant reformsapplicable to public companies generally. These reforms include, among others:

• “Say on Pay.” The “say on pay” provisions of the Act require publiccompanies to hold nonbinding shareholder votes on the compensation oftheir named executive officers, as such compensation is disclosed in theannual proxy statements of public companies.

• “Golden Parachutes.” Subject to certain exceptions, the Act require a publiccompany that is seeking approval by its shareholders of a fundamentalcorporate transaction to submit any “golden parachute” arrangements to anonbinding shareholder vote.

• Proxy Access. The Act expressly authorized the SEC to adopt rules to allowshareholders to gain access to a company’s proxy statement to propose theirown director nominees or to propose changes to bylaws relating to thenomination or election of directors. On August 25, 2010, the SEC adoptednew rules under the Exchange Act to grant shareholders such access. Theeffectiveness of the proxy access rules have been stayed by the SEC pendingresolution of a petition being heard in the Court of Appeals for the District ofColumbia.

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• Compensation Committee Independence and Authority to Retain Advisors.Subject to certain exceptions, the Act requires all public companies listed ona national securities exchange or association to comply with certainenhanced independence requirements for members of their compensationcommittees and their compensation committee advisers and consultants. Inaddition, compensation committees are required to have the authority toretain and obtain advice from independent compensation consultants, legalcounsel and other advisers.

• Enhanced Executive Compensation Disclosures. The Act requires publiccompanies to disclose in their annual proxy statements information thatshows the relationship between the compensation that is actually paid toexecutive officers and the financial performance of the company. Inaddition, public companies will be required to disclose certain informationregarding internal pay equity, including the ratio of the median of the totalcompensation of all employees to the total annual compensation of the CEO.

• Incentive Compensation Clawback Policy. The Act directs the SEC to adoptrules prohibiting the listing of a company on a national securities exchangeor association if the company has not adopted and implemented a clawbackpolicy that meets certain minimum requirements.

• Director and Employee Hedging Policy. The Act directs the SEC to adoptrules requiring that public companies disclose in their annual proxystatements whether employees or directors are allowed to purchase financialinstruments that are designed to hedge against or offset any decrease in themarket value of equity securities held by such persons.

• Board Leadership Structure. The Act directs the SEC to adopt rulesrequiring that a public company disclose in its annual proxy statement thereasons why it has chosen either the same person or different individuals toserve in the positions of chairman of the board and CEO.

• Whistleblower Incentives and Protections. The Act amends the ExchangeAct to provide financial incentives for whistleblowers to provide informationto the SEC regarding securities laws violations by their employers, andprovides new protections for employee whistleblowers who provide suchinformation.

• Foreign Audit Work Papers. The Act amends the Sarbanes-Oxley Act of2002 (SOX) to subject certain foreign public accounting firms to thejurisdiction of U.S. courts and to require such firms to produce audit workpapers and related documents upon request of the SEC or the PublicCompany Accounting Oversight Board (PCAOB) under certaincircumstances.

• Broker Voting. The Act prohibits brokers from voting securities atshareholder meetings on certain matters, including the election of directorsand executive compensation, without voting instructions from the beneficialholders of such securities. On September 9, 2010 and September 24, 2010,the SEC approved changes to New York Stock Exchange Rule 452 andNASDAQ Rule 2251, respectively, which reflect the Act’s new requirement.

As this handbook goes to publication, the SEC has yet to propose implementingrules for a number of the statutory provisions noted above. Securities lawspractitioners and other compliance professionals will be monitoring the SEC’srulemaking docket with great interest during the coming months, as many of theseprovisions grant the SEC a great deal of discretion to determine the scope of the newreporting, corporate governance and disclosure obligations that will be placed onpublic companies. We discuss the SEC’s proposed rulemaking schedule in greaterdetail in the section of this handbook entitled “The Dodd-Frank Wall Street Reformand Consumer Protection Act.”

The Dodd-Frank Act is part of an ongoing shift towards increased regulatory andshareholder scrutiny of the stewardship of public companies. Given this shift, it hasnever been more important for public company officers and directors and theprofessionals that advise them to ensure that their companies have in place a robustprocess to consider the impact of these developments on their companies and to takethe necessary actions to update and enhance their disclosures and governancepractices.

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THE DODD-FRANK WALL STREET REFORM AND CONSUMERPROTECTION ACT

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall StreetReform and Consumer Protection Act, which we refer to in this handbook as theDodd-Frank Act. While the Dodd-Frank Act focuses primarily on financial regulatoryreform and consumer financial protections in response to the recent financial crisis, theDodd-Frank Act also contains a number of corporate governance and other securitieslaws provisions directed at public companies. This chapter provides an overview of thekey corporate governance and securities laws provisions of the Dodd-Frank Act,including provisions relating to:

• shareholder approval of executive compensation arrangements (or,“say-on-pay”);

• shareholder access to company proxy statements;

• the independence of compensation committees and their advisors;

• a comparison of executive compensation to company performance;

• a comparison of the compensation of the company’s CEO to thecompensation of all other employees;

• incentive compensation clawback policies;

• employee and director hedging policies;

• board leadership structures;

• whistleblower incentives and protections;

• foreign audit work papers;

• broker voting;

• conflict minerals, mine safety and extractive industries disclosures; and

• filing deadlines for Schedule 13D and Form 3.

With certain exceptions, the Dodd-Frank Act requires the SEC to promulgate newregulations relating to the Act’s provisions within 360 days after the Dodd-Frank Act’senactment date of July 21, 2010. Companies will need to comply with some of theAct’s corporate governance provisions during the 2011 proxy season, though many ofthe provisions will likely not be effective until the 2012 proxy season. A notableexception to this timeline is the implementation of certain of the “say-on-pay”

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THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

provisions, which will become effective for a company’s first annual or specialshareholders’ meeting taking place on or after January 22, 2011. In addition, certainother provisions, such as those relating to whistleblower protections, do not requireany additional SEC rulemaking before taking effect. Below is a schedule identifyingthe effective date of each provision along with the current status of SEC rulemakingwith respect to such provisions.

SEC IMPLEMENTATION SCHEDULE

Dodd-Frank Provision Effective Date Status of RulemakingSay-on-Pay and Frequency ofSay-on-Pay Shareholder Votes

First shareholders’ meetingtaking place on or afterJanuary 22, 2011

Proposed Rules – October 18,2010

Golden Parachute Say-on-PayShareholder Votes

Subject to SEC rulemaking Proposed Rules – October 18,2010

Proxy Access July 22, 2010 Final Rule – August 25, 2010Original effective date stayedby SEC on October 4, 2010

Compensation CommitteeIndependence andCompensation CommitteeAdvisors

Subject to SEC rulemaking Expected – December 2010Required – no later thanJuly 16, 2011

Executive CompensationDisclosures

Subject to SEC rulemaking Expected – April-July 2011

Incentive CompensationClawback Policies


Director and EmployeeHedging Policies


Board Leadership Structure Subject to SEC rulemaking Required – no later thanJanuary 17, 2011

Whistleblower Incentives andProtections

July 22, 2010 Proposed Rules – November 3,2010

Foreign Audit Work Papers July 22, 2010 Not applicableBroker Voting July 22, 2010 Final NYSE Rule – approved

by the SEC on September 9,2010

Conflict Minerals, Mine Safetyand Extractive IndustriesDisclosures

July 22, 2010 for Mine Safetydisclosures with the conflictminerals and extractiveindustries disclosures subjectto SEC rulemaking

Proposed Rules – December 15,2010

Filing Deadlines for Schedule13D and Form 3

Subject to SEC rulemaking No expected date for proposedrule changes has beenannounced by the SEC

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SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION

(“SAY-ON-PAY”)

Introduction

Section 951 of the Dodd-Frank Act created new Section 14A under the ExchangeAct, which requires public companies to ask their shareholders to approve certainexecutive compensation proposals. Section 14A also requires certain institutionalinvestment managers to publicly disclose their votes on such proposals. The principalsay-on-pay provisions of Section 14A do not require additional rule-making by theSEC to be effective. Nevertheless, as discussed in more detail below in the part of thissection titled “Recent Development – Proposed Rules Implementing the Say-on-PayProvisions of the Dodd-Frank Act,” the SEC has issued two rule proposals toimplement new Section 14A.

Say-on-Pay

New Section 14A(a)(1) of the Exchange Act requires each public company tohold a nonbinding shareholder vote on the compensation of the company’s namedexecutive officers, as such compensation is disclosed in the company’s proxystatement. This vote, commonly known as a say-on-pay proposal, must take place atthe company’s first annual or special shareholders’ meeting occurring on or afterJanuary 22, 2011 (which is six months after the enactment of the Dodd-Frank Act).The shareholder vote is purely advisory and will not be construed as:

• overruling a decision of the company or its board of directors;

• creating, implying or changing the fiduciary duties of the company or itsboard of directors; or

• restricting or limiting the ability of shareholders to make proposals forinclusion in proxy materials related to executive compensation.

The SEC is expressly authorized to exempt an issuer or class of issuers from thesay-on-pay vote requirement.

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Practice Tip: Companies should revisit their shareholder communicationsprograms in anticipation of the “say-on-pay” vote. In addition, companies shouldreview their compensation programs and consider whether their compensationprograms include any features (such as tax gross-ups) that might result in anegative vote recommendation by proxy advisory firms, such as RiskMetrics.Finally, companies should review their compensation disclosures and assure thatthese disclosures are clear and understandable. In particular, companies shouldassure that their Compensation Discussion and Analysis discloses therelationship between executive compensation and company performance. Theinclusion of an executive summary in the Compensation Discussion and Analysissection should be included to assist readers. Where applicable, the executivesummary should highlight any recent changes made to the company’scompensation practices to align with best practices.

Section 14A(a)(2) of the Exchange Act also requires that companies submit totheir shareholders, at least once every six years, a vote on a separate resolution todetermine whether to have say-on-pay votes every year, every two years or every threeyears. This separate vote on the frequency of say-on-pay proposals must also initiallybe held at the first annual or special shareholders’ meeting occurring on or afterJanuary 22, 2011. Some companies have already voluntarily adopted say-on-pay votesat the request of their shareholders or for corporate governance reasons. In addition,Section 111(e) of the Emergency Economic Stabilization Act (EESA) of 2008 requiredcertain public companies to adopt say-on-pay votes as a condition to receive fundingunder the Troubled Asset Relief Program (TARP). Voluntary say-on-pay adopters willneed to comply with the new Dodd-Frank Act requirements for the frequency ofsay-on-pay votes, even if they have adopted annual say-on-pay proposals. The SEChas stated, however, that it will not object if companies with outstanding TARPliabilities do not comply with the frequency of say-on-pay vote requirements so longas they are in full compliance with the say-on-pay provisions of the EESA.

The Dodd-Frank Act does not specify the exact design of the frequency vote onsay-on-pay (that is, whether it should be a multiple choice vote with all options or anup or down vote on a single option). The SEC has proposed that shareholders be ableto check a box to vote for any of the options, including to hold the vote every year,every two years, every three years or to abstain. See “Recent Development – ProposedRules Implementing the Say-on-Pay Provisions of the Dodd-Frank Act” below.

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Nevertheless, existing rules provide that company proxy cards may only includechoices to approve, disapprove or abstain from voting on an item (usually, marked“FOR”, “AGAINST” or “ABSTAIN”). Therefore, the SEC has stated that it will notobject prior to the implementation of final rules if a company provides shareholderswith options consistent with the proposed rule. In addition, if proxy service providersare not capable of handling four multiple choice options in a company proposal, theSEC will not object if companies include only votes for every year, every two years orevery three years and omit the option of shareholders to abstain from voting on theproposal.

Golden Parachutes

New Section 14A(b) of the Exchange Act requires public companies that areseeking the approval of their shareholders for an acquisition, merger, consolidation, orproposed sale or other disposition of all or substantially all their assets to disclose anycompensation arrangements they have with their named executive officers (or withthose of the acquiring company, if they are not the acquiring company) that are basedon or otherwise relate to the transaction. Such arrangements are often referred to as“golden parachute arrangements.” The golden parachute disclosure must include theaggregate total amount of the compensation concerning any type of compensation thatis related to the transaction. Public companies are also required to submit sucharrangements to a nonbinding shareholder vote, unless the arrangements havepreviously been subject to a vote by the shareholders. The golden parachute disclosureand voting provisions are subject to rule-making by the SEC and will only be requiredwith respect to shareholder meetings where applicable corporate transactions are beingapproved.

Like the shareholder say-on-pay vote, the shareholder golden parachute vote willbe nonbinding and purely advisory to the company and its board of directors.Likewise, the golden parachute vote will not be construed as:

• overruling a decision of the company or its board of directors;

• creating, implying or changing the fiduciary duties of the company or itsboard of directors; or

• restricting or limiting the ability of shareholders to make proposals forinclusion in proxy materials related to executive compensation.

As with the say-on-pay vote, the SEC is authorized to exempt an issuer or class ofissuers from the golden parachute vote requirement. For information about the

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exemptions proposed by the SEC in its proposed rules implementing the say-on-payprovisions of the Dodd-Frank Act, see the section below entitled “Recent Development– Proposed Rules Implementing the Say-on-Pay Provisions of the Dodd-Frank Act.”

Investment Advisors

New Section 14A(d) of the Exchange Act requires every institutional investmentmanager subject to Section 13(f) of the Exchange Act (that is, those institutionalinvestment managers exercising investment discretion over $100 million or more ofU.S. public company equity securities and certain other securities) to annually disclosetheir votes on the say-on-pay, golden parachute and frequency of say-on-payproposals.

RECENT DEVELOPMENT – PROPOSED RULES IMPLEMENTING THE

SAY-ON-PAY PROVISIONS OF THE DODD-FRANK ACT

On October 18, 2010, the SEC released two proposed rules designed toimplement Section 14A of the Exchange Act. The first proposed rule would implementand provide guidance on how public companies should include the advisory proxyvotes related to executive compensation in their proxy materials. The other proposedrule addressed the manner in which institutional investment managers must discloseproxy votes on the Section 14A advisory executive compensation proposals.

Shareholder Approval of Executive Compensation and Golden ParachuteCompensation

Say-on-Pay Proposals.

Under proposed Rule 14a-21(a), public companies would be required to include asay-on-pay proposal in their annual proxy statement (or other proxy statement orconsent solicitation statement including executive compensation disclosures) at leastonce every three years. The proposed rule does not mandate specific language for theproposal. However, the rule does specify that the vote must relate to all executivecompensation disclosed in the proxy statement, whether in the compensation tables, theCompensation Discussion and Analysis or in the narrative to the compensation tables.Non-management director compensation is not required to be subject to a say-on-payvote. Companies holding say-on-pay votes will need to discuss the vote in their proxystatement, including a brief description of the nonbinding nature of the vote.

The SEC also proposes to amend the executive compensation disclosure rules torequire the Compensation Discussion and Analysis to address whether and how the

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compensation committee has considered the results of say-on-pay proposals and howthat consideration affected its compensation policies and practices. Smaller reportingcompanies, which are not required to include a Compensation Discussion and Analysisin their proxy statements, would be exempt from this disclosure requirement. All ofthe other say-on-pay provisions would apply to smaller reporting companies.However, because they are already subject to annual say-on-pay votes under TARP,public companies with outstanding liabilities under TARP would be exempt from thesay-on-pay and frequency of say-on-pay vote requirements until those liabilities havebeen repaid.

Practice tip: Companies should consider amending their compensationcommittee charters to provide that the committees need to take into considerationthe results of the say-on-pay votes in making determinations with respect to theircompensation policies and practices.

Under proposed Rule 14a-21(b), public companies would be required to includethe frequency of say-on-pay votes in their annual proxy statements that includeexecutive compensation disclosures at least once every six years. The Dodd-Frank Acthad not addressed exactly how companies were to hold this vote, including whethercompanies should allow shareholders to choose from all of the options (that is, fromevery year, every two years or every three years or to abstain) or whether companiescould propose a particular frequency of the vote and have shareholders vote for oragainst that proposal. In addition, it was not clear whether voting would be by aplurality or majority or whether the vote would simply be advisory. Proposed Rule14a-21(b) would clarify that the vote would only be advisory (nonbinding on the boardof directors), and proposes that the shareholders should be allowed to choose from allof the multiple options.

Practice tip: Companies should review their bylaws to ensure that the bylawsallow multiple choice votes at shareholders’ meetings.

Similar to the requirements of the proposed rule relating to the say-on-payproposal, companies holding the frequency vote will need to discuss the vote in theirproxy statement, including a brief description of the nonbinding nature of the vote.The board of directors of a company can make a recommendation to shareholdersabout the frequency of the vote, but the recommendation should make it clear thatshareholders have the option to select from all of the choices and are not being asked

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to approve or disapprove the board’s recommendation. In addition, although the votewould be nonbinding, companies would be required to disclose in their next annualreport on Form 10-K or quarterly report on Form 10-Q their decision on howfrequently to hold the say-on-pay proposal in light of the results of the frequency vote.As a benefit, companies that adopt a policy on the frequency of say-on-pay votes thatis consistent with the vote of the plurality of their shareholders would be able toexclude from their proxy statements any shareholder say-on-pay proposals orshareholder proposals on the frequency of say-on-pay.

Practice tip: Proxy rules require the filing of a preliminary proxy statementwhenever the company includes a proposal other than the election of directors,ratification of auditors, approval or amendment of an equity compensation planor a shareholder proposal included pursuant to Rule 14a-8. Therefore, undercurrent SEC rules, companies that include a management say-on-pay proposal orfrequency of say-on-pay proposal in their proxy statements would need to filetheir proxy statements in preliminary form with the SEC. The SEC previouslyexempted TARP companies from this requirement and is proposing to exempt allcompanies from the requirement of filing a preliminary proxy statement solelybecause of a say-on-pay or frequency of say-on-pay vote. In addition, until theSEC passes final rules, the SEC has stated that it will not object if issuers do notfile a preliminary proxy statement solely because of the say-on-pay andfrequency of say-on-pay vote proposals.

Golden Parachute Proposals.

The proposed rules, which are required for the implementation of the goldenparachute say-on-pay voting requirement to be effective, would expand the disclosurerequirements relating to golden parachute arrangements. Specifically, the proposedrules would require new tabular and narrative disclosure on golden parachutearrangements in any proxy statement or consent solicitation where shareholders arebeing asked to approve a merger, acquisition, consolidation or proposed disposition ofall or substantially all of the assets of a public company. The rules would also requirethis disclosure in filings for similar types of transactions, including going-privatetransactions under Rule 13E and in tender offers. Under the proposed rules, thesoliciting issuer would be required to disclose all golden parachute arrangementsbetween:

• the target company and the target company’s named executive officers,

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• the target company and the acquiring company’s named executive officers,and

• the acquiring company and the target company’s named executive officers.

The golden parachute say-on-pay vote would only apply to arrangements between thesoliciting company and its named executive officers (or with the named executiveofficers of the acquiring company, if it is not the acquirer). As provided in the Dodd-Frank Act, companies are not required to seek shareholder approval of any goldenparachute arrangements that had previously been subject to a say-on-pay vote. In orderto take advantage of this exception, public companies would need to have included thenew tabular and narrative disclosures in their most recent annual proxy statements thatincluded a general say-on-pay proposal.

Practice tip: Under the proposed rules, in order to take advantage of theexception to the golden parachute vote, it would not be sufficient for companiesto have included only the current disclosures required by the SEC with respect tocompensation payable in connection with a change in control or termination ofservice, as the new tabular and narrative disclosure requirements for goldenparachutes are in addition to and different than the disclosures required underexisting rules. Rather, companies would be required to include the additionalgolden parachute tabular and narrative disclosure in their proxy statements whichinclude say-on-pay proposals. In addition, the exception applies only to theextent that such golden parachute arrangements were previously disclosed andhad not been modified. If any arrangements were modified or entered into afterthe last say-on-pay vote where such arrangements were properly disclosed, themodified or new arrangements (but not the previously approved terms orarrangements) would be subject to a golden parachute say-on-pay vote. It is notexpected that companies will include the additional disclosures needed to availthemselves of this exception. In particular, the inclusion of such disclosurescould be interpreted by investors as an indication that the company iscontemplating a change in control transaction. In addition, the inclusion of suchdisclosures might focus shareholders on a company’s golden parachutearrangements when evaluating their regular say-on-pay vote.

Investment Manager Reporting of Proxy Votes on Executive Compensation

Proposed Rule 14Ad-1 would implement the say-on-pay disclosure provisions ofthe Dodd-Frank Act with respect to institutional investment managers. The proposed

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rule would require disclosure on Form N-PX of the Section 14A say-on-pay votes castby institutional investment managers subject to Section 13(f) of the Exchange Act withrespect to any securities over which they have sole or shared voting power. Theinformation to be included in the Form N-PX relating to the Section 14A votesincludes, among other things, information about the issuer, a description of the mattervoted on, the number of shares able to be voted and the number actually voted, howthe shares were voted, and whether the vote was for or against the recommendation ofthe issuer’s board of directors.

PROXY ACCESS

SEC rules that are currently in effect prohibit shareholders from gaining access toa company’s proxy statement to propose their own director nominees or to proposechanges to a company’s governing documents relating to the nomination or election ofdirectors. In late 2009, the SEC proposed changes to the federal proxy rules tofacilitate shareholder access to the proxy statements (and proxy cards) of publiccompanies for these purposes.

Section 971 of the Dodd-Frank Act, included in part over concerns that the SEClacked the regulatory authority to enact the proxy access rules, expressly authorizes theSEC to prescribe rules that would require proxy statements to include:

• nominees submitted by shareholders to serve on the board of directors of theissuer; or

• proposed changes to a company’s governing documents relating to thenomination or election of directors.

The Dodd-Frank Act only authorized the passage of proxy access rules; it did notrequire the SEC to enact such rules or specify the details of the rules. In response tothe passage of the Dodd-Frank Act, on August 25, 2010, the SEC adopted finalchanges to the federal proxy rules to facilitate shareholder access to proxy materials.The effectiveness of the proxy access rules has been stayed by the SEC pendingresolution of a petition being heard in the Court of Appeals for the District ofColumbia. For more information about the proxy access rules promulgated by theSEC, please see the section of this handbook entitled “Proxy Statement and AnnualReport Disclosures and Process – Recent Development – Final Proxy Access Rule.”

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COMPENSATION COMMITTEE INDEPENDENCE AND AUTHORITY TO RETAIN

ADVISORS

Compensation Committee Independence

Section 952 of the Dodd-Frank Act requires that stock exchanges adopt listingstandards requiring that each member of a public company’s compensation committeebe an independent member of the board of directors. The Act further directs the SECto define independence by considering several relevant factors (which mirror theeligibility criteria for audit committee members under Section 301 of SOX), including:

• the source of the committee member’s compensation, including anyconsulting, advisory or other compensatory fee paid by the company to thedirector; and

• whether the committee member is affiliated with the issuer, a subsidiary ofthe issuer or an affiliate of the issuer’s subsidiary.

These independence requirements will not apply to (i) foreign private issuers thatannually disclose to their shareholders why they do not have an independentcompensation committee, (ii) limited partnerships, (iii) companies in bankruptcyproceedings, (iv) open-ended management investment companies registered under theInvestment Company Act of 1940, as amended or (v) “controlled companies,” whichare listed companies of which more than 50% of the voting power for the election ofdirectors is held by an individual, group or other company.

Under currently existing New York Stock Exchange rules, with certainexceptions, a New York Stock Exchange listed company must have a compensationcommittee composed entirely of independent directors whose responsibilities includereviewing and approving matters related to the compensation of the company’s CEOand making recommendations to the full board of directors with respect to thecompensation of other executives. Likewise, companies listed on NASDAQ must alsohave independent director oversight of executive officer compensation, whetherthrough the independent members of the board of directors or a compensationcommittee composed entirely of independent directors. For these and other reasons,most public companies’ compensation committees already consist of only independentdirectors. Nevertheless, SEC rulemaking in furtherance of the Dodd-Frank Act mayimpose enhanced independence requirements for compensation committee members.

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Authority to Retain Advisors

Section 952 of the Dodd-Frank Act requires public companies to givecompensation committees the authority to hire their own compensation consultants,independent legal counsel and other advisors, and to be responsible for thecompensation and oversight of such advisors. Public companies must provide forappropriate funding, as determined by the compensation committee, for payment ofreasonable compensation to the compensation consultants, legal counsel and otheradvisors. The compensation committee is not required, however, to implement or actconsistently with the advice or recommendations of such advisors. Moreover, suchadvice or recommendations should not affect the ability or obligation of acompensation committee to exercise its own judgment in fulfillment of its duties.

Practice Tip: Public companies should review their existing compensationcommittee charters to make sure that the charters conform with the provisions ofSection 952 and any rules the SEC adopts to implement such provisions. Manycompensation committee charters, however, may already grant the committee theability to hire and compensate its own advisors. For example, existing New YorkStock Exchange rules (but not the listing rules of NASDAQ) require New YorkStock Exchange listed companies to provide their compensation committees withthe power to appoint compensation consultants.

There has traditionally not been any significant emphasis on compensationcommittees retaining independent legal counsel and it is not clear how the Dodd-FrankAct might impact the retention of legal advisors by compensation committees. Asimilar provision in SOX required public companies to permit their audit committeesto retain independent legal counsel. Nevertheless, audit committees have tended toretain independent legal counsel only in circumstances involving special investigationsrelating to financial restatement matters.

COMPENSATION CONSULTANTS AND ADVISORS

In addition to the requirements relating to the independence of the compensationcommittee and its authority to retain advisors, Section 952 of the Dodd-Frank Actrequires compensation committees to take into consideration certain factors to bespecified under rules to be adopted by the SEC in selecting compensation consultants,legal counsel and other advisors. In particular, the Dodd-Frank Act requires the SEC to

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identify those factors that affect the independence of compensation consultants, legalcounsel and other advisors, while preserving the ability of compensation committees toretain the services of such advisors. These factors must include:

• the provision of other services to the company by the person that employsthe compensation consultant, legal counsel or other advisor;

• the amount of fees received from the issuer by the person that employs thecompensation consultant, legal counsel or other advisor, as a percentage ofthe total revenue of the person that employs the advisor;

• the policies and procedures of the person that employs the compensationconsultant, legal counsel or other advisor designed to prevent conflicts ofinterest;

• any business or personal relationship of the compensation consultant, legalcounsel or other advisor with a member of the compensation committee; and

• any stock of the public company owned by the compensation consultant,legal counsel or other advisor.

While the compensation consultants, legal counsel and other advisors are not requiredto be independent, compensation committees may only appoint and select advisorsafter considering the SEC’s independence factors.

The Dodd-Frank Act further instructs the SEC to ensure that the factors describedabove are “competitively neutral” among the categories of consultants, legal counseland other advisors. At this time, absent further direction from the SEC, the meaningand effect of “competitively neutral” is unclear. Based on the Congressional record, itappears, however, that Congress was focused at a minimum on ensuring equaltreatment for large and small consultants.

Compensation Consultant Independence Disclosure Requirement

In any proxy or consent solicitation material for an annual shareholders’ meetingoccurring on or after July 21, 2011, in accordance with the SEC regulations to beissued in furtherance of the Dodd-Frank Act, a public company must disclose:

• whether the compensation committee retained or obtained the advice of acompensation consultant; and

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• whether the work of the compensation consultant has raised any conflict ofinterest and, if so, the nature of the conflict and how the conflict is beingaddressed.

This enhanced disclosure requirement only applies to compensation consultants (andnot to other advisors).

Under rules recently enacted by the SEC, public companies are required todisclose in their proxy statements certain information about the fees paid tocompensation consultants and their affiliates if the consultant or its affiliates providedother non-executive and non-director compensation consulting services to thecompany that generated fees in excess of $120,000 during the company’s last fiscalyear. The recently enacted rules did not require independent directors or boardapproval of such non-executive compensation consultant services. We expect,however, that as a result of the Act, compensation committees will develop policiesand procedures to address potential conflicts of interest resulting from other servicesprovided by the consultant or other relationships between the consultant and thecompany.

The Dodd-Frank Act requires the SEC to direct the national securities exchangesand national securities associations to prohibit the listing of any security of an issuer(other than a controlled company) that is not in compliance with the compensationconsultant and proxy statement disclosure provisions discussed above. The SEC rulespromulgated under this section must also provide for appropriate procedures for apublic company to have a reasonable opportunity to cure any defect that would be thebasis for a prohibition before its implementation.

EXECUTIVE COMPENSATION DISCLOSURES

Item 402 of Regulation S-K requires public companies other than foreign issuersto disclose certain information about the compensation they pay to certain namedexecutive officers and non-employee directors. Section 953 of the Dodd-Frank Actdirects the SEC to amend Item 402 to require additional disclosures comparing (i) thecompensation paid to executive officers with the company’s financial performance(Pay versus Performance) and (ii) the compensation paid to the CEO with the averagecompensation paid to all other employees (Pay Equity). Proposed rules regardingExecutive Compensation Disclosure are not expected until the spring of 2011.

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Pay versus Performance

Section 953 of the Dodd-Frank Act directs the SEC to promulgate rules requiringpublic companies to provide a clear description of their executive compensationprograms. Specifically, public companies will be required to disclose in their proxystatements for annual shareholders’ meetings information that shows the relationshipbetween the executive compensation paid to executive officers and the financialperformance of the company. Such figures should take into account changes in thestock value and dividends of the company and any distributions. The SEC rules, whichare not expected until the spring of 2011, will likely address the precise scope of thisrequirement, including the definitions of “executive compensation,” “executiveofficers,” and “financial performance.” Section 953, however, does indicate that thedisclosure may be provided in the form of a performance graph.

Pay Equity

Section 953 of the Dodd-Frank Act also directs the SEC to amend Item 402 ofRegulation S-K to require public companies to disclose the following information inany SEC filing that requires the disclosure of named executive officer compensation:

• the median of the total annual compensation of all employees other than theCEO;

• the total annual compensation of the CEO; and

• the ratio of these two amounts.

This disclosure is to be provided in accordance with rules to be adopted by theSEC. However, Section 953 specifies that the total compensation of all employeesshould be calculated according to the methods used under Item 402 to calculate namedexecutive officer pay.

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Practice Tip: Considering the resources needed to calculate the total annualcompensation for named executive officers, the calculation of the median of thetotal annual compensation of all employees other than the CEO will likely be asignificant burden for many companies. For example, total annual compensationfor named executive officers reflects increases in pension values and the costs ofperquisites, which may not be information that is readily available for allemployees. Until the SEC proposes rules implementing this provision of theDodd-Frank Act, it is not clear how the SEC will address these practicalproblems. To address concerns about the potential burdens on companies, theSEC may choose to provide that this disclosure shall be treated as furnished andnot filed under the securities laws. Also, the SEC proposed rules could allow forratios that use estimates in the calculation.

INCENTIVE COMPENSATION CLAWBACK POLICY

Section 954 of the Dodd-Frank Act requires the SEC to adopt rules directing thenational securities exchanges to prohibit the listing of any company that does not adoptand implement a “clawback” policy that meets certain minimum requirements. Uponadoption of the new rules, a listed company will be required to develop and implementa policy providing that, in the event that the company is required to prepare anaccounting restatement due to material noncompliance with any financial reportingrequirement under the securities laws, the company will recover the portion of anyincentive compensation (including stock options) based on erroneous data and grantedto any executive officer during the 3-year period preceding the date the financialstatements are required to be restated that are in excess of what would have been paidto the executive officer under the restated financial statements. Such clawback policyis required to apply to both current and former executive officers, without regard towhether such officers engaged in any misconduct.

In addition to requiring the clawback of erroneously paid incentive compensationas described above, a listed company will be required to disclose its policy onincentive-based compensation that is based on financial information required to bereported under the securities laws.

Section 954’s clawback requirement is significantly broader than the clawbackrequirement contained in Section 304 of SOX, which is discussed in greater detail inthe chapter of this book entitled “The Sarbanes Oxley Act.” Under SOX, if a companyis required to restate its financial statements due to material noncompliance, as a result

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of misconduct, with any financial reporting requirement under the securities laws, thecompany’s CEO and CFO must reimburse the company for any bonus or otherincentive or equity-based compensation received from the company during the12-month period following the publication or SEC filing (whichever is first) of thefinancial document being restated, and any profits realized from the sale of thecompany’s securities during that period. SOX’s clawback requirement is narrowerthan that of the Dodd-Frank Act in the following respects:

• SOX’s requirement applies only to a company’s CEO and CFO, whereas therules to be issued pursuant to the Dodd-Frank Act will apply to all currentand former executive officers;

• SOX’s requirement only applies if there has been misconduct, whereas therules to be issued pursuant to the Dodd-Frank Act will apply without regardto whether the restatement results from misconduct; and

• SOX requires a clawback of compensation received during 12-month periodfollowing the publication or SEC filing (whichever is first) of the financialdocument being restated, whereas the rules to be issued pursuant to theDodd-Frank Act will require clawback of erroneous awards granted duringthe 3-year period preceding the date of restatement.

The SEC’s tentative rulemaking schedule indicates that the SEC will propose rulesunder Section 954 between April and July 2011.

Practice Tip: In addition to adopting and developing a clawback policy thatmeets the new requirements, a listed company must consider whether to amendits incentive compensation award agreements in order to provide the companywith the right to claw back erroneously paid compensation. Because the scope ofthe required clawback policy will not be known until the SEC issues final rules, itis recommended that companies wait until the new rules are adopted beforedetermining what actions to take.

DIRECTOR AND EMPLOYEE HEDGING POLICY

Section 955 of the Dodd-Frank Act directs the SEC to adopt rules that willrequire an issuer to disclose information regarding its director and employee hedgingpolicy in the proxy or consent solicitation materials for its annual shareholders’meetings. Specifically, an issuer will be required to disclose whether any employee or

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director (or any designee of such person) is permitted to purchase financial instrumentsdesigned to hedge against a decrease in the market value of equity securities(i) granted to the employee or director as part of such person’s compensation or(ii) directly or indirectly held by such employee or director. The types of hedginginstruments that will be subject to the rules will include, at minimum, prepaid variableforward contracts, equity swaps, collars and exchange funds. The SEC’s tentativerulemaking schedule indicates that the SEC will propose rules under Section 955between April and July 2011.

Practice Tip: Employee and director hedging is often addressed in a company’sinsider trading policy. While many companies may determine to prohibit hedgingtransactions (or may already prohibit such transactions), we expect that aconsiderable number of companies will wish to maintain flexibility to allow forlegitimate hedging transactions that allow insiders to monetize their equityinterests. It is recommended that companies which do consider adopting a policyto prohibit such activities, or updating any applicable policies already in place,wait to do so until the SEC has adopted rules clarifying the scope of thedisclosure requirements.

BOARD LEADERSHIP STRUCTURE

Section 972 of the Dodd-Frank Act requires the SEC to issue rules by January 17,2011 requiring public companies to disclose in their proxy statements for their annualshareholders’ meetings the reasons why they have chosen either the same person ordifferent individuals to serve in the positions of chairman of the board and CEO. SECrules enacted in December 2009 included a requirement that public companies discussthe rationale for their board leadership structure, including with respect to theChairman and CEO positions. Section 972 of the Dodd-Frank Act appears to simplycodify the rule change and does not appear to impose any additional requirements onpublic companies.

WHISTLEBLOWER INCENTIVES AND PROTECTIONS

Section 922 of the Dodd-Frank Act creates new financial incentives forwhistleblowers to report suspected securities laws violations directly to the SEC.Section 922 added a new Section 21F to the Exchange Act. Under Section 21F, anyeligible whistleblower who provides the SEC with original information relating to apreviously unknown violation of the securities laws derived from his or her own

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knowledge and analysis, which leads to a successful enforcement action resulting inover $1 million in monetary sanctions, must be awarded between 10% and 30% of thesanctions collected. A whistleblower may receive an award under Section 21F if thefollowing conditions are met:

• the whistleblower provided “original information” to the SEC (see “OriginalInformation” below);

• the original information provided by the whistleblower led to a successfuljudicial or administrative enforcement action resulting in over $1 million inmonetary sanctions; and

• the whistleblower is not otherwise disqualified from receiving an award forany of the reasons specified in Section 21F (see “Eligibility for Awards”below).

The Dodd-Frank Act requires the SEC to issue final regulations implementingSection 21F by April 18, 2011. On November 3, 2010, the SEC issued proposedimplementing regulations. The public comment period for the proposed rules will endon December 17, 2010, after which the SEC is expected to issue final rules. However,it is important to note that the whistleblower provisions of Section 21F becameeffective immediately upon enactment of the Dodd-Frank Act, and, as a result, anotherwise eligible whistleblower will be eligible to receive an award so long as theinformation was provided after July 21, 2010. Furthermore, the new whistleblowerprovisions apply with respect to all securities laws violations, regardless of whetherthey occurred prior to or after July 21, 2010.

Original Information. For purposes of Section 21F, “original information” meansinformation that:

• is derived from the independent knowledge or analysis of a whistleblower;

• is not known to the SEC from any other source, unless the whistleblower isthe original source of the information; and

• is not exclusively derived from an allegation made in a judicial oradministrative hearing, in a government report, hearing, audit orinvestigation, or from the news media, unless the whistleblower is the sourceof the information.

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For purposes of the above definition, the SEC’s proposed rules would define“independent knowledge” to mean factual information in the whistleblower’spossession that is not derived from publicly available sources. Similarly, the proposedrules would define “independent analysis” as the whistleblower’s own analysis,whether done alone or in combination with others.

The proposed rules would also identify a number of specific circumstances underwhich information will not be considered to be derived from the whistleblower’sindependent knowledge or analysis. Under one such exclusion, a person with legal,compliance, audit, supervisory or governance responsibilities for any entity wouldgenerally not be considered to have provided independent knowledge or analysiswhere the information was communicated to such person with the reasonableexpectation that he or she would take steps to cause the entity to respond to suchviolation. Similarly, the proposed rule provides that a person would generally not beconsidered to have provided independent knowledge or analysis where he or sheobtained the information otherwise from or through an entity’s legal, compliance,audit or other similar functions or process for identifying, reporting and addressingpotential non-compliance with law. However, each of the two exclusions identifiedabove would cease to be applicable if the entity does not disclose the information tothe SEC within a reasonable time or if the entity proceeds in bad faith. The SEC’sstated rationale for these proposed exclusions was to avoid implementing Section 21Fin such a way that would create incentives for persons who obtain information throughlegal, compliance and audit functions to circumvent or undermine the proper operationof the entity’s internal processes for responding to securities laws violations.

Many public companies have established telephone hotlines and other internalreporting procedures through which employees may anonymously report any concernsof potential wrongdoing. Some observers have suggested that the way “originalinformation” is defined by the statute may provide an incentive to an employee whosuspects a potential securities law violation to bypass these internal reportingprocedures and report his or her suspicions directly to the SEC or anonymouslythrough a lawyer. An employee who reported information about a suspected violationinternally could worry that he or she will be deprived of his or her chance to receive anaward if the company were to subsequently self-report the violation to the SEC and theinformation was no longer deemed “original.” As a result, these observers areconcerned that the effectiveness of internal corporate compliance programs could bejeopardized.

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To partially address this concern, the SEC’s proposed implementing rule grantsthe benefit of a 90-day “look-back” period to any employee who reports informationregarding suspected violations internally to appropriate compliance personnel. Forpurposes of determining his or her eligibility to receive an award, such an employeewhistleblower who subsequently reports the same information to the SEC will bedeemed to have done so as of the date that he or she disclosed such informationinternally.

Practice Tip: A company may consider taking the following steps in order tostrengthen its compliance program in light of the provisions of Section 21F:

• Offer incentives to employees to report suspected violations internally.

• Review and update the company’s code of business conduct, insidertrading policy and other ethics policies.

• Conduct training programs that inform employees of where they shouldreport any suspected violations of the law or the company’s ethicspolicies.

• Adopt a policy prohibiting retaliation against whistleblowers andpublicize this policy internally.

• Ensure that all procedures for internal reporting are in place, including ameans by which employees may anonymously report suspectedviolations.

• Promptly investigate any violations reported by internal whistleblowers.

Eligibility for Awards. The following persons will be ineligible to receive awardsunder Section 21F:

• certain current and former members of regulatory agencies, the Departmentof Justice, self-regulatory organizations (SROs), the Public CompanyAccounting Oversight Board (PCAOB) and law enforcement organizations;

• any whistleblower who is convicted of a criminal violation related to theenforcement action for which the whistleblower otherwise could receive anaward;

• any whistleblower who gains the information through the performance of arequired audit and for whom making a whistleblower submission would becontrary to the requirements of Section 10A of the Exchange Act; and

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• any whistleblower who fails to submit information to the SEC as it mayrequire.

In addition, the SEC’s proposed implementing rules would disqualify anywhistleblower who (i) acquired the submitted information from one of the abovesources, (ii) is a close relative of an SEC employee or (iii) knowingly and willfullymade any false statement or representation to the SEC.

Notably, nothing in Section 21F excludes a non-U.S. person from receiving anaward. Accordingly, an employee of a U.S. company’s foreign subsidiary may receivean award from the SEC if he or she is otherwise eligible. This may be of particularconcern to any U.S. company whose overseas operations expose it to enforcement riskunder the Foreign Corrupt Practices Act (FCPA), because monetary sanctions arisingfrom FCPA violations can be very substantial.

Size of Awards. The SEC will have discretion under Section 21F to award awhistleblower anywhere from 10% to 30% of the amount that is collected of themonetary sanctions imposed in the SEC enforcement action and in any related actionbrought by the Attorney General of the United States, an appropriate regulatoryagency, an SRO, or a State attorney general in connection with any criminalinvestigation. The SEC will consider (i) the significance of the information providedby the whistleblower to the enforcement action, (ii) the degree of assistance providedby the whistleblower and his or her legal representative in the enforcement action,(iii) the programmatic interest of the SEC in deterring violations of the securities lawsand (iv) any other relevant factors established under the SEC’s implementingregulations.

New Anti-Retaliation Protections for Whistleblowers. Section 21F also includesnew legal protections for employee whistleblowers who lawfully provide informationregarding securities law violations to the SEC (or who provide certain other assistanceto the SEC based upon or related to such information) and are consequentlydischarged, demoted, threatened, harassed or otherwise discriminated against in theterms or conditions of their employment. These protections include a new private rightof action for (i) reinstatement of employment, (ii) two times back pay owed to theindividual, plus interest and (iii) compensation for litigation costs, expert witness feesand reasonable attorney’s fees. This new private right of action may be brought in afederal district court within six years of the violation or three years of discovery of theviolation, but in no case more than ten years after the violation. Under the SEC’s

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proposed implementing rules, a whistleblower would be entitled to these protections ifhe or she has provided information with respect to a potential securities laws violation,even if the SEC or the courts ultimately determine that no actual securities lawsviolation occurred.

Subject to certain exceptions, the SEC is prohibited from disclosing anyinformation which could reasonably be expected to reveal the identity of anywhistleblower.

Amendments to Existing SOX Whistleblower Provisions. In addition to creatingnew Section 21F of the Exchange Act, the Dodd-Frank Act also makes certainamendments to the whistleblower provisions of SOX, including the following:

• Section 922(c) of the Dodd-Frank Act extends the statute of limitations forSOX whistleblower claims from 90 to 180 days after the employee becameaware of the retaliatory conduct;

• Section 922(e) of the Dodd-Frank Act amends the SOX whistleblowerprovision such that the rights and remedies provided for therein may not bewaived by any agreement, policy form or condition of employment,including by a pre-dispute arbitration agreement; and

• Section 929A of the Dodd-Frank Act extends SOX whistleblower protectionto employees of all consolidated subsidiaries and affiliates of a publiccompany.

Notably, the whistleblower provisions of SOX are not displaced or limited by theprovisions of new Section 21F of the Exchange Act, and continue to be effectiveindependent of Section 21F.

FOREIGN AUDIT WORK PAPERS

Section 929J of the Dodd-Frank Act amends Section 106 of SOX to includeoversight of both foreign public accounting firms and the registered public accountingfirms who use them.

Foreign Public Accounting Firms. Foreign public accounting firms who performmaterial services upon which a registered public accounting firm relies in the conductof an audit or interim review, issues an audit report, performs audit work or conductsinterim reviews:

• are subject to the jurisdiction of U.S. courts; and

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• must produce foreign audit work papers and all other documents of the firmrelated to any such work, upon request, to the SEC or PCAOB.

Registered Public Accounting Firms. Additionally, any registered publicaccounting firm that relies on the work of a foreign public accounting firm must:

• also produce the foreign audit work papers and all other documents of thefirm related to any such work; and

• obtain an agreement of the foreign public accounting firm for suchproduction as a condition to its reliance on the work of such foreign firm.

Additionally, any foreign public accounting firm that performs work for aregistered public accounting firm must consent to the rules to be promulgated by theSEC pursuant to Section 929J of the Dodd-Frank Act. Section 981 of the Dodd-FrankAct allows the PCAOB to share all information it receives, including such foreignaudit work papers with the applicable foreign auditor oversight authority withoutlosing the information’s status as confidential or privileged.

These provisions are effective immediately.

BROKER VOTING

As described in more detail in the section of this handbook titled “ProxyStatement and Annual Report Disclosures and Process – Broker Voting,” most brokersand other intermediaries are subject to Rule 452 of the New York Stock Exchange,which permits them to vote shares for which they have not received voting instructionsfrom the beneficial holders only on what are referred to as “routine” matters. If thebeneficial holders do not provide voting instructions to the intermediaries, theintermediaries will not be permitted to vote those shares on most matters that comebefore a shareholders’ meeting, including on the election of directors, the approval oramendment of equity compensation plans and most other matters involvingfundamental corporate transactions.

Section 957 of the Dodd-Frank Act imposes a new requirement that nationalsecurities exchanges prohibit their member organizations (that is, the brokers and otherintermediaries) from granting or authorizing a proxy to vote the shares held by streetholders on any executive compensation matters without the instructions of suchholders. Under prior rules, votes on executive compensation not involving an equityincentive plan, including votes on management say-on-pay proposals, were treated as

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routine matters in which the intermediaries could vote without instructions from thestreet holder. In response to the new requirement of the Dodd-Frank Act, the NewYork Stock Exchange filed a proposed rule change to Rule 452 and correspondingNYSE Listed Company Manual Section 402.08 on August 26, 2010, to prohibit brokerdiscretionary voting on all executive compensation matters, including the say-on-pay,frequency of say-on-pay and golden parachute votes. The SEC approved the rulechange on an accelerated basis on September 9, 2010. Likewise, The NASDAQ StockMarket LLC filed a proposed rule change on September 14, 2010, which amendedNASDAQ Rule 2251 to prohibit its member organizations from voting shares withoutinstructions from the beneficial owners in matters regarding the election of directors orexecutive compensation or any other “significant matter,” as determined by the SEC.The SEC approved the rule change on an accelerated basis on September 24, 2010.

SOX REPORTS FOR SMALLER REPORTING COMPANIES AND

NON-ACCELERATED FILERS

Section 989G of the Frank-Dodd Act amended Section 404 of SOX by adding anew subsection exempting smaller reporting companies and non-accelerated filersfrom the requirement that their independent auditors prepare an attestation report onthe company’s internal controls over financial reporting and include that report in theirquarterly and annual reports on Forms 10-Q and 10-K.

NEW CONFLICT MINERALS, MINE SAFETY AND EXTRACTIVE INDUSTRIES

DISCLOSURES

Title XV of the Dodd-Frank Act contains three “Miscellaneous Provisions” thatimpose new disclosure obligations on public companies that operate in certainextractive industries or use specified conflict minerals in their products or productionmethods.

Use of Conflict Minerals

Section 1502 of the Dodd-Frank Act requires the SEC to enact rules by April 15,2011 requiring certain public companies to disclose whether their products orproduction methods use conflict minerals that originated in the Democratic Republicof Congo or its adjoining countries.

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Conflict minerals are defined as columbite-tantalite (coltan), cassiterite, gold,wolframite, or their derivatives, and any other minerals or derivatives determined bythe Secretary of State to be financing conflict in the Democratic Republic of the Congoor an adjoining country.

On December 15, 2010, the SEC issued proposed rules to implement Section1502. Under the proposed rules, if conflict minerals are necessary to the functionalityor production of a product manufactured, or contracted to be manufactured, by apublic company, the public company would be required to disclose whether its conflictminerals originated in the Democratic Republic of the Congo or an adjoining country.If the conflict minerals originated in the Democratic Republic of the Congo or anadjoining country (or if the company is not able to conclude that its conflict mineralsdid not originate in such countries), the company would be required to furnish a“Conflict Minerals Report” as an exhibit to its annual report that includes, among othermatters, a description of the measures taken by the company to exercise due diligenceon the source and chain of custody of its conflict minerals. These due diligencemeasures would include, but would not be limited to, an independent private sectoraudit of the company’s report conducted in accordance with standards established bythe Comptroller General of the United States. The Conflict Minerals Report would berequired to include a description of the products manufactured or contracted to bemanufactured that are not “DRC conflict free.” “DRC conflict free” is defined inSection 1502 to mean products that do not contain minerals that directly or indirectlyfinance or benefit armed groups in the Democratic Republic of the Congo or anadjoining country. Any company required to furnish a report would be required tocertify that it obtained an independent private sector audit of its report and make itsreports available to the public on its website.

Mine Safety

Pursuant to Section 1503 of the Dodd-Frank Act, public companies that operatecoal or other mines must disclose in all periodic reports filed after the enactment of theAct detailed information related to health and safety violations under the Federal MineSafety and Health Act of 1977, as well as any pending legal actions before the FederalMine Safety and Health Review Commission, with respect to the periods covered bysuch reports. The SEC issued proposed rules implementing Section 1503 onDecember 15, 2010.

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Payments by Resource Extraction Issuers

Under Section 1504 of the Dodd-Frank Act, the SEC is directed to enact rules byApril 15, 2011 requiring public companies that engage in the commercial developmentof oil, natural gas or minerals (“resource extraction issuers”) to disclose any paymentsthey or their subsidiaries have made to the U.S. or foreign governments for the purposeof commercial development of those resources. The SEC issued proposed rulesimplementing Section 1504 on December 15, 2010.

FILING DEADLINES FOR SCHEDULE 13D AND FORM 3

Section 929R of the Dodd-Frank Act amended Section 13(d) of the Exchange Actto authorize the SEC to establish by rule a shorter time period within which a Schedule13D must be filed. Similarly, the Act amended Section 16(a) to authorize a shortertime period within which a new Section 16 insider would be required to file a Form 3.As this handbook goes to publication, the SEC has not proposed any rule change thatwould shorten either of the current 10-day reporting windows applicable to thesefilings.

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PERIODIC AND CURRENT REPORTING UNDERTHE EXCHANGE ACT

Under Section 13(a) of the Securities Exchange Act of 1934, as amended (whichwe refer to as the Exchange Act), and its implementing regulations, every companywith a class of securities registered under Section 12 of the Exchange Act is requiredto file certain periodic and current reports with the SEC. The obligation to register aclass of securities under Section 12 of the Exchange Act may arise pursuant to either:(i) Section 12(b), which requires the registration of securities listed for trading on anational securities exchange; or (ii) Section 12(g), which generally requires a companyto register a class of its equity securities if the company has more than $10 million intotal assets and the class is held of record by 500 or more persons. In addition,Section 15(d) of the Exchange Act requires companies that have had an offering ofsecurities registered under the Securities Act of 1933, as amended (which we refer toas the Securities Act), to comply with the same reporting requirements imposed bySection 13(a) on companies that have a class of securities registered under Section 12of the Exchange Act. Throughout this handbook, we refer to companies subject to thereporting requirements of Section 13(a) or Section 15(d) as “public companies” or“issuers.”

REPORTING FORMS

Assuming it does not qualify as a “foreign private issuer,” the principaldocuments filed by a public company to comply with its reporting obligations underSection 13(a) or 15(d) of the Exchange Act include its Annual Report on Form 10-K,Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Below is a briefsummary of each of these documents, which are discussed in more detail later in thissection:

Annual Reports on Form 10-K

A company’s Annual Report on Form 10-K includes the company’s yearlyaudited financial statements and is the company’s primary investor disclosuredocument regarding key aspects of its business, financial statements and businessprospects and risks, including the following items:

• a description of its business;

• risk factors and legal proceedings;

• a discussion and analysis of the company’s operating results and its liquidityand capital resources; and

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PERIODIC AND CURRENT REPORTING UNDER THE EXCHANGE ACT

• an evaluation of the company’s disclosure controls and procedures and anassessment of the effectiveness of its internal controls over financial reporting.

The Form 10-K also includes various matters related to compensation andcorporate governance, which may be, and usually are, included in the company’sannual proxy statement and incorporated by reference into its Form 10-K.

Quarterly Reports on Form 10-Q

A company’s Quarterly Report on Form 10-Q provides its unaudited quarterlyfinancial statements and generally updates certain disclosures made in its previouslyfiled Form 10-K. Among other things, a company is generally required to report onForm 10-Q the following information in respect of its most recently completed fiscalquarter:

• a discussion and analysis of the company’s operating results and its liquidityand capital resources;

• an evaluation of the company’s disclosure controls and procedures;

• any material changes to its risk factors and legal proceedings disclosures;and

• any unregistered sales of equity securities or repurchases of the company’sequity securities.

In addition, both the Form 10-K and Form 10-Q must be accompanied bycertifications from the company’s principal executive and principal financial officersas to the accuracy of the information provided in the reports and the design andeffectiveness of the company’s disclosure controls and procedures and internalcontrols over financial reporting.

Current Reports on Form 8-K

A company is required to file or furnish with the SEC a Current Report on Form8-K to disclose the occurrence of certain material events. Triggering events thatgenerally require the filing or furnishing of a Form 8-K include:

• entering into, or terminating, a material contract;

• material acquisitions or dispositions;

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• the disclosure of quarterly or annual financial results;

• material financing arrangements;

• the acceleration of material financing obligations;

• material exit or disposal activities;

• delisting or non-compliance with a listing rule;

• unregistered sales of the company’s equity securities;

• a change in accountants;

• a determination that the company’s previously issued financial statementsshould no longer be relied upon;

• changes in the board of directors;

• the appointment, retirement, resignation or termination of certain executiveofficers, or the entry into or amendment of a material compensatoryarrangement with such officers;

• charter and bylaw amendments; and

• amendments to or waivers of the company’s code of ethics.

In addition, public companies are required to file a Form 8-K to report the votingresults of shareholders’ meetings.

Public companies organized outside the United States that meet the definition of a“foreign private issuer” are not required to file or furnish reports on Forms 10-K, 10-Qor 8-K, and instead are subject to reporting on Forms 20-F and 6-K. We discuss thereporting and disclosure requirements applicable to foreign private issuers in thesection of this handbook entitled “Foreign Private Issuer Reporting and Compliance.”

CATEGORIES OF PUBLIC COMPANIES

There are four main categories of public companies for Exchange Act reportingpurposes:

Large Accelerated Filers

A company becomes a large accelerated filer after it first meets the followingconditions as of the end of a fiscal year: (i) it had a public float (i.e., an aggregate

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worldwide market value of the voting and non-voting common equity held by itsnon-affiliates) of $700 million or more, as of the last business day of its most recentlycompleted second fiscal quarter; (ii) it has been subject to the reporting requirementsof the Exchange Act for at least 12 months; (iii) it has filed at least one Annual Reporton Form 10-K; and (iv) it is not eligible to file as a smaller reporting company forpurposes of its Annual and Quarterly Reports.

Accelerated Filers

An accelerated filer is a company that would otherwise qualify as a largeaccelerated filer, except that it had a public float of at least $75 million, but less than$700 million, as of the last business day of the second fiscal quarter of its mostrecently completed fiscal year.

Smaller Reporting Companies

A smaller reporting company is generally any company that is not an investmentcompany, an asset-backed issuer, or a majority-owned subsidiary of a parent that is nota smaller reporting company, provided that:

• it had a public float of less than $75 million as of the last business day of thesecond fiscal quarter of its most recently completed fiscal year;

• in the case of an initial registration statement under the Securities Act orExchange Act for shares of its common equity, it had a public float(computed based upon the estimated public offering price of its shares) ofless than $75 million as of a date within 30 days of the date of the filing ofthe registration statement; or

• in the case of a company whose public float was zero as calculated forpurposes of the above two bullets (e.g., because it had no public equityoutstanding or no market price for its equity existed), it had annual revenuesof less than $50 million during the most recently completed fiscal year forwhich audited financial statements are available.

Smaller reporting companies are subject to reduced reporting requirements insome instances, including with respect to their financial statements and internalcontrols over financial reporting.

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Non-Accelerated Filers

A “non-accelerated filer” is generally any company that does not qualify as alarge accelerated filer or an accelerated filer. In most (but not all) cases, anon-accelerated filer will also be a smaller reporting company and a smaller reportingcompany will also be a non-accelerated filer.

ASSET-BACKED ISSUERS

Asset-backed issuers are subject to modified reporting requirements pursuant towhich they may omit certain items normally required to be disclosed on Forms 10-K,10-Q and 8-K but are required to furnish certain other information prescribed inRegulation AB. Because it is a highly specialized area that is unlikely to be relevant tothe majority of readers, this handbook does not cover the reporting obligations ofasset-backed issuers.

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FILING DEADLINES; FAILURE TO TIMELY FILE A REQUIRED REPORT

The filing deadlines for Forms 10-K, 10-Q and 8-K are as follows:3

Filing Form Large Accelerated Filers Accelerated Filers

Non-Accelerated Filers/Smaller ReportingCompanies

Form 10-K Within 60 days afterthe end of thecompany’s fiscal year

Within 75 days afterthe end of thecompany’s fiscal year

Within 90 days after theend of the company’sfiscal year

Form 10-Q Within 40 days afterthe end of thecompany’s fiscalquarter

Within 40 days afterthe end of thecompany’s fiscalquarter

Within 45 days after theend of the company’sfiscal quarter

Form 8-K Form 8-Ks are generally due within four business days following thetriggering event. Certain items, however, including disclosures madepursuant to Regulation FD, may require the company to file a Form 8-Kon a shorter timetable.

It is common practice for a company to file a Form 8-K promptly after itsearnings release and prior to its earnings call in order to avail itself of asafe harbor from the otherwise applicable requirement to file anadditional Form 8-K to disclose the release of material financialinformation made during its earnings call. This safe harbor, and earningsreleases generally, are discussed in greater detail later in this section.

Another exception to the four business day rule are financial statementsof any business acquired in a material acquisition disclosed onForm 8-K, which is required to be filed either with the initial report onForm 8-K disclosing the material acquisition or by amendment not laterthan 71 calendar days after the date such initial report must be filed.

3 The deadlines provided herein are the general deadlines for the respective forms, which may not applyin all circumstances. Forms can be filed with the SEC on Monday through Friday, except for Federalholidays (i.e., days when the SEC is closed). Forms due on a date when a filing cannot be made are due onthe next business day. Most Exchange Act filings must be transmitted no later than 5:30 p.m. Eastern timeon the due date. However, registration statements that are filed pursuant to Rule 462(b) under theSecurities Act to increase the number of shares in an offering and insider filings on Forms 3, 4 and 5 mayreceive the same day’s filing date if transmitted up to 10:00 p.m. Eastern time.

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A company that fails to timely file a periodic report on Forms 10-K or 10-Q or acurrent report on Form 8-K violates Sections 13(a) or 15(d) of the Exchange Act andmay be subject to enforcement action by the SEC. Such a failure could also subject thecompany to liability under Section 10(b) of the Exchange Act and Rule 10b-5thereunder. Rules 13a-11(c) and 15d-11 provide a safe harbor from such liability forfailures to file reports required to be made pursuant to certain Form 8-K items –specifically, Items 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a), 5.02(e) and 6.03. Thesafe harbor extends only until the next date on which the company is required to file aperiodic report on Form 10-K or 10-Q. Significantly, the safe harbor does not provideprotection from 10b-5 liability for material misstatements or omissions contained in aForm 8-K.

In addition to potential liabilities under the Exchange Act, a company that fails totimely file an Exchange Act report may be rendered ineligible to file a “short-form”registration statement on Form S-3. In order to use Form S-3, a company generallymust have filed in a timely manner all reports required to be filed during the 12-monthperiod preceding the filing of the Form S-3. There is a limited exception to this generalrule for reports required to be filed pursuant to certain items on Form 8-K –specifically, Items 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a) and 5.02(e). Additionally,a company’s failure to furnish to the SEC the Form 8-K required by Item 2.02 in atimely manner will not affect such company’s eligibility to use Form S-3, becausesuch reports are “furnished” to the SEC rather than “filed.” The failure to timely file areport pursuant to any other items of Form 8-K or to timely file any periodic reports,however, will render the company ineligible to use a Form S-3 for 12 months.Moreover, a company is in all cases required to be current in all of its filings at thetime it actually files the Form S-3.

FORM 10-K

All public companies other than foreign private issuers must file an AnnualReport on Form 10-K following the end of each fiscal year. The Annual Reportgenerally includes the following itemized disclosures:

Part I

Item 1 – Business. A description of the business of the company and anydevelopments in its business since the beginning of the most recently completed fiscalyear.

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Item 1A – Risk Factors. The risk factors investors should consider wheninvesting in the company (which are discussed in more detail below).

Item 1B – Unresolved Comments. For accelerated filers and large acceleratedfilers, a description of any material unresolved comments from the SEC staff regardingthe company’s periodic and current reports, which were received 180 days or morebefore the end of the fiscal year.

Item 2 – Properties. A description of the company’s real property (rented orowned).

Item 3 – Legal Proceedings. A description of any material legal proceedingsother than ordinary routine litigation incidental to the business, to which the companyor any of its subsidiaries is a party or to which any of its property is subject, and anysuch proceedings that were terminated in the fourth quarter of its fiscal year (alongwith a description of the outcome).

Item 4 – (Removed and Reserved). Effective February 28, 2010, the disclosureof voting results under Item 4 has been eliminated and the results must be reportedinstead in a Current Report on Form 8-K. Issuers should include the item in the bodyof their Form 10-K written as “Item 4. (Removed and Reserved).” with the disclosureleft blank.

Part II

Item 5 – Securities and Trading Markets. This item principally includes thefollowing disclosures:

• an Equity Compensation Plan Information table, which may be incorporatedby reference to the company’s proxy statement; this table is described inmore detail in the section of this handbook entitled “Proxy Statement andAnnual Report Disclosures and Process;”

• the trading market for the company’s common stock, along with thehistorical high and low sales prices by quarter for the two most recent fiscalyears and any subsequent interim periods;

• the number of registered holders of each class of common stock;

• the frequency and amount of cash dividends and the company’s intentionsregarding future payments of dividends;

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• unregistered sales of securities not previously disclosed in a Form 10-Q or8-K; and

• information on a monthly basis relating to any repurchases by the companyof its common stock during the fourth quarter.

Item 6 – Selected Financial Data. A comparative presentation of selectedfinancial data for the last five fiscal years.

Item 7 – MD&A. The management’s discussion and analysis of the company’soperating results and its liquidity and capital resources (which is discussed in moredetail below).

Item 7A – Market Risk. Quantitative and qualitative disclosures relating tomarket sensitive instruments held by the company and other primary market riskexposures. Smaller reporting companies do not need to provide the informationrequired by this item.

Item 8 – Financial Statements. The audited consolidated financial statements ofthe company, along with certain supplementary quarterly financial data. The schedulesto the financial statements may be filed under Item 15 of the Form 10-K.

Item 9 – Changes in and Disagreements with Accountants. If there has been achange in the principal accountants of the company, disclosure of: (i) anydisagreements with the accountants that the accountants would have been required todisclose; or (ii) any “reportable event” that had occurred, which was material andaccounted for or disclosed in a manner different from what the former accountantswould have apparently concluded was required. Disclosure is required with respect todisagreements or reportable events that occurred during the year in which the changein accountants took place or during the subsequent year.

Item 9A – Controls and Procedures. This item principally includes thefollowing disclosures:

• the conclusion of the company’s principal executive and financial officersregarding the effectiveness of the company’s disclosure controls andprocedures (which are discussed in more detail below in the “DisclosureControls and Procedures” part of this section and in the section of thishandbook entitled “The Sarbanes-Oxley Act”);

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• management’s assessment of the effectiveness of the company’s internalcontrol over financial reporting, including disclosure of any materialweakness in its internal controls;

• an attestation report of the independent auditors on the company’s controlover financial reporting; and

• any changes in the company’s internal control over financial reporting thathave materially affected, or are reasonably likely to materially affect, suchinternal controls.

Companies need not comply with this item until after they have filed an AnnualReport on Form 10-K for a prior fiscal year. As codified in Section 989G of the Dodd-Frank Act, smaller reporting companies and non-accelerated filers are exempt from therequirement to include the attestation report of the independent auditors on thecompany’s internal control over financial reporting. See the section of this handbookentitled “The Dodd-Frank Wall Street Reform and Consumer Protection Act – SOXReports for Smaller Reporting Companies and Non-Accelerated Filers.”

Item 9B – Other Information. Any information required to be reported in aForm 8-K during the fourth quarter that was not reported.

Part III

The following Part III items can be (and commonly are) incorporated byreference to the company’s annual proxy statement, provided that such proxystatement is filed within 120 days of the company’s fiscal year end. If the proxystatement is not filed within such 120-day period, the company must file anamendment to its Form 10-K prior to the end of such period that includes the Part IIIinformation.

For a more detailed discussion of the Part III disclosures required by Items 10-14of Form 10-K, see the section of this handbook entitled “Proxy Statement and AnnualReport Disclosures and Process.”

Item 10 – Directors, Executive Officers and Corporate Governance

Item 11 – Executive Compensation

Item 12 – Security Ownership

Item 13 – Related Person Transactions and Director Independence

Item 14 – Accountant Fees and Services

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Practice Tip: Whenever theissuer files an amendment to itscharter or bylaws on a periodicreport, it must file a completecopy of the charter or bylaws asamended; amendments shouldnot be filed separately.

Part IV

Item 15 – Exhibits and Financial Statement Schedules. Companies should listunder this item their financial statements and the schedules required to be filed byItem 8, along with all exhibits required to be filedby Item 601 of Regulation S-K. The exhibits to theForm 10-K will generally include: (i) all materialcontracts; (ii) the company’s organizationaldocuments; (iii) all instruments defining the rightsof security holders; (iv) a list of the company’ssignificant subsidiaries; (v) any applicable consentsof experts and counsel (namely, the consent of theindependent auditors where the financial statements are incorporated by reference inone or more registration statements); (vi) certifications under SOX, which aredescribed in more detail below; and (vii) if required, interactive data files with thecompany’s financial statements in XBRL (see “XBRL Requirements” below). Mostexhibits can be incorporated by reference to a previously filed document. Managementcontracts and compensatory plans and arrangements must be specifically identified.

Summary of Selected Items

Risk Factors. Item 503(c) of Regulation S-K requires public companies todisclose under the caption “Risk Factors” a discussion of the most significant factorsthat make investing in the securities of the company risky or speculative. The factorsshould be those risks that are specific to the company and should not include risks thatapply to every public company. As a general rule, any fact or circumstance that couldpose a risk to the company’s financial condition, results of operations or potentialgrowth, or which could otherwise materially affect the performance of the company’ssecurities, may be a risk factor. In addition to identifying the risk factors, the companymust discuss how each factor could affect the company or its securities. The discussionof risk factors must be written in plain English.4 Smaller reporting companies are notrequired to provide the information required under this item. Many smaller reportingcompanies, however, will include risk factors in their Annual Reports to takeadvantage of a safe harbor defense for forward-looking statements.

4 In general, a document written in plain English will avoid the use of definitions or technical terms, beconcise and well organized and use clear and active statements. See Rule 421(d) under the Securities Act.

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Section 21E of the Exchange Act provides a safe harbor defense for companies insecurities litigation for forward-looking statements that are made by the company in itsExchange Act reports. This defense is similar to the defense in Section 27A of theSecurities Act and the “bespeaks caution” defense developed in securities case law.Forward-looking statements, which are commonly found in a company’s MD&A(defined below), are statements not of historical fact but of the expectations of thecompany with respect to its future performance or other predictions or expectationsregarding future events. To qualify for the safe harbor, companies must identify theforward-looking statements in the report with sufficient particularity and accompanythe statements by cautionary language that identifies the significant factors that couldcause actual results to materially differ from those contained in the forward-lookingstatements. The risk factors identified in the Form 10-K and other filings can providethe meaningful cautionary language required by the safe harbor.

Management’s Discussion and Analysis of Financial Condition and Results ofOperations. Item 303 of Regulation S-K requires a discussion and analysis of thecompany’s operating results and its liquidity and capital resources. As articulated bythe SEC, the purpose of this disclosure is to present the company’s financial conditionand results of operations “through the eyes of management” and to provide the contextfor analysis of the financial information presented in the periodic report. A criticalrequirement of the Management’s Discussion and Analysis of Financial Condition andResults of Operations (better known as the MD&A) is to disclose any known trends,commitments, events or uncertainties that have had or are reasonably likely to have amaterial effect (positive or negative) on the company’s operating results or liquidity.The MD&A should identify and discuss the principal drivers that have impacted andwill continue to impact the company’s operating results and financial condition, aswell as key performance measures, including non-financial performance indicators,which are used by management and which would be material to investors, particularlywhere management refers to these measures in its earnings releases. In general, theMD&A should emphasize material information and de-emphasize or omit immaterialor duplicative information. Among other material items, the MD&A should include ananalysis of the following matters relating to the company:

• changes in cash flows;

• debt instruments and certain related covenants, including covenants: (i) thecompany has breached or is reasonably likely to breach; or (ii) that materiallyrestrict the company’s ability to incur additional debt or equity financing;

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• critical accounting policiesand estimates that requiresubjective judgments toaccount for uncertainmatters or matters subjectto change;

• any material taxcontingencies or trends oruncertainties that couldaffect the company’s taxobligations or effective taxrate;

• commitments for capitalexpenditures;

• material contingenciesarising from pendinglitigation and regulatorymatters;

• commitments forenvironmentalexpenditures; and

• any off-balance sheetarrangements.

The MD&A should include aliquidity and capital resources sectionthat provides a clear picture of thecompany’s ability to generate cashand to meet existing and known orlikely future cash requirements. Thediscussion should focus on material changes and trends in operating, investing andfinancing cash flows and the reasons underlying those changes. The MD&A must alsoinclude quantitative tabular disclosure regarding the company’s contractualobligations. For more information about disclosures relating to off-balance sheet

Practice Tip: The Office of the ChiefAccountant of the Division of Corporationhas been reminding public companies oftheir obligations under ASC Subtopic 450-20 (formerly, SFAS 5) to establish accrualsfor litigation and other contingencies whenit is probable that a loss has been incurredand the amount of the loss can bereasonably estimated. When a loss is notboth probable and estimable, an accrual isnot recorded, but disclosure of thecontingency is required to be made whenthere is at least a reasonable possibility thata loss or an additional loss has beenincurred. The disclosure should indicate thenature of the contingency and give anestimate of the possible loss or range ofloss or state that such an estimate cannot bemade. Rule 10-01(a)(5) of Regulation S-Xrequires the disclosure of materialcontingencies in interim financialstatements. The Staff also expectscompanies to update their loss contingencydisclosures as new information becomesavailable. Reporting of litigation and othercontingencies may be made on anaggregate basis. In addition to financialstatement reporting, companies also need toaddress disclosure of litigation and othercontingencies in their risk factors, legalproceedings and MD&A disclosures.

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transactions and contractual obligations in the MD&A, see the “Enhanced DisclosureRequirements” discussion in the section of this handbook entitled “The Sarbanes-OxleyAct.”

Practice Tip: On September 17, 2010, the SEC issued interpretive guidance on thepresentation of liquidity and capital resources in the MD&A. The interpretiveguidance reminds companies that the MD&A is required to identify and separatelydescribe internal and external sources of liquidity and briefly describe any materialunused sources of liquidity. Important trends and uncertainties relating to liquiditymight include difficulties in accessing the debt markets, reliance on commercialpaper on other short-term financing arrangements, maturity mismatches betweenborrowing sources and the assets funded by those sources, changes in termsrequested by counterparties, changes in the valuation of collateral, and counterpartyrisk. In addition, if borrowings during the reporting period are materially differentthan the period-end amounts recorded in the financial statements, disclosure aboutthe intra-period variations is required to properly disclose the company’s liquidityposition. Disclosures of contingencies affecting off-balance sheet financings also isrequired in the MD&A. In a companion release, the SEC proposed amendments toenhance the disclosures that companies present about short-term borrowings. Theproposed rules would require a company to provide, in a separately captionedsubsection of the MD&A, a comprehensive explanation of its short-termborrowings, including both quantitative and qualitative information.

Sarbanes-Oxley Certifications. The Sarbanes-Oxley Act of 2002 created twocertification requirements for the principal executive and principal financial officers ofpublic companies. Section 302 of SOX requires a certification that is filed with eachquarterly and annual report and which states that the reports are accurate and completeand that the company has in place adequate disclosure controls and procedures andinternal control over financial reporting. Section 906 of SOX requires a certificationthat is furnished5 with any report containing financial statements and which states thatthe report fully complies with Sections 13(a) or 15(d) of the Exchange Act and fairlypresents, in all material respects, the financial condition and results of operations ofthe company. Although paragraph 3 of the Section 302 certification may be omitted incertain circumstances, and plural references to “certifying officers” in paragraphs 4and 5 can be made singular, the certifications must otherwise strictly follow thelanguage provided in SEC rules. The SEC has said that it will not accept an altered

5 Unlike information that is “filed”, information that is “furnished” is not: (i) subject to the liabilityprovisions of Section 18 of the Exchange Act; or (ii) automatically incorporated by reference into thecompany’s registration statements.

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certification even if the alteration would appear to be inconsequential. If a filedcertification is not correct and complete, the accompanying report may be consideredby the SEC to be materially incomplete and deemed not filed (thus potentiallyaffecting Form S-3 eligibility, among other things). Additional discussion of theSection 302 and Section 906 certifications can be found in the section of this handbookentitled “The Sarbanes-Oxley Act.”

Signatures

The Form 10-K must be signed on behalf of the company by a duly authorizedofficer as well as by its principal executive officer(s), its principal financial officer(s),its controller or principal accounting officer, and by at least a majority of the membersof the board of directors. When the form is filed by a limited partnership, it must besigned by at least a majority of the members of the board of directors of any corporategeneral partner that signs the report.

XBRL Requirements

On January 30, 2009, the SEC published a rule requiring public companies, inany of their filings that include financial statements, to include interactive data fileswith the financial statements readable in XBRL (eXtensible Business ReportingLanguage) format. A three-year phase-in period applies to the rule in accordance withthe following schedule:

Filer Filing Requirements

Domestic and foreign large acceleratedfilers that use U.S. GAAP and have aworldwide public common equity floatabove $5 billion as of the end of thesecond quarter of the most recentlycompleted fiscal year

Beginning with the next quarterlyreport on Form 10-Q or, for foreignfilers, the next annual report on Form20-F or 40-F, for a fiscal period thatended on or after June 15, 2009

All other domestic and foreign largeaccelerated filers that use U.S. GAAP

Beginning with the next quarterlyreport on Form 10-Q or, for foreignfilers, the next annual report on Form20-F or 40-F, for a fiscal period thatended on or after June 15, 2010

All remaining filers Beginning with the next quarterlyreport on Form 10-Q or, for foreignfilers, the next annual report on Form20-F or 40-F, for a fiscal period thatended on or after June 15, 2011

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Initially, the notes and schedules to the financial statements may be included as asingle block of text. After one year of filing, however, the detailed quantitativedisclosures in the notes and schedules must also be tagged in XBRL. Companies arenot required to, but may, tag each narrative disclosure in the footnotes and schedules.The XBRL exhibits must also be available on the company’s corporate website.

Companies are required to state on the cover page of each periodic report whetherall XBRL filings have been filed and posted as required during the preceding 12months. Companies which are not yet required to file their financial statements inXBRL format should include this question in accordance with the form and leave the“yes” and “no” boxes blank.

FORM 10-QPublic companies other than foreign private issuers are required to file a

Quarterly Report on Form 10-Q with respect to each of their first three fiscal quarters.The Quarterly Report generally presents financial information for and as of the end ofthe fiscal quarter and generally updates the disclosures made in the Annual Report onForm 10-K. The Form 10-Q includes the following itemized disclosures:

Part I – Financial Information (All Part I items must be included in everyQuarterly Report)

Item 1 – Financial Statements. The unaudited quarterly financial statements ofthe company.

Item 2 – MD&A. The MD&A should discuss and analyze the operating resultsfor quarterly and year-to-end periods, as well as the company’s liquidity and capitalresources. The disclosures included in the Annual Report on Form 10-K regardingmaterial trends, commitments, contingencies and other developments should beupdated, where applicable.

Item 3 – Market Risk. The market risk disclosures from the Annual Reportshould be updated.

Item 4 – Controls and Procedures. The information required to be disclosed in theQuarterly Report is similar to that required in the Annual Report on Form 10-K, exceptthat management’s assessment of the effectiveness of the internal controls over financialreporting and the auditor’s attestation report do not need to be included in the Form 10-Q.

Part II – Other Information (Non-applicable Part II items may be omitted)

Item 1 – Legal Proceedings. Any new material legal proceeding or materialdevelopment relating to a previously disclosed legal proceeding should be disclosed.

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Item 1A – Risk Factors. Any material changes in the risk factors disclosed inthe Annual Report on Form 10-K should be disclosed. Smaller reporting companiesare not required to respond to this item.

Item 2 – Unregistered Sales of Equity Securities and Repurchases. Anyunregistered sale of securities during the quarter, other than unregistered salespreviously disclosed on a Form 8-K. Companies also should disclose any sharesrepurchased during the quarter.

Item 3 – Defaults Upon Senior Securities. Any significant defaults with respectto payments on its debt obligations or any material arrearages in the payment ofdividends.

Item 4 – (Removed and Reserved). Effective February 28, 2010, the disclosureof voting results under Item 4 has been eliminated and the results must be reportedinstead in a Current Report on Form 8-K. Issuers should simply exclude any referenceto Item 4 in their Quarterly Reports on Form 10-Q.

Item 5 – Other Information. Under this item, companies must disclose: (i) anyinformation which should have been but was not reported on a Form 8-K; and (ii) anymaterial changes to the process for shareholders to recommend nominees to the boardof directors. Companies also are required to report under this item any change in thedeadline for shareholder proposals where the annual meeting date is changed by morethan 30 days from the date of the prior year’s annual meeting.

Item 6 – Exhibits. The company should file any exhibit not previously filed withits Annual Report on Form 10-K if the obligation to file the exhibit arose during theapplicable fiscal quarter. In addition, companies must include certifications by theirprincipal executive and principal financial officers identical to those filed with theAnnual Report on Form 10-K (discussed above in the “Form 10-K” part of this section).

Signatures

The Form 10-Q must be signed on behalf of the company by a duly authorizedofficer and by the principal financial or chief accounting officer of the company.

FORM 8-K

In addition to the periodic reports on Forms 10-K and 10-Q, companies subject tothe Exchange Act’s reporting requirements are required to file a Current Report onForm 8-K to disclose the occurrence of an event specified in the form.

With some exceptions, reports on Form 8-K are generally required to be filedwith or furnished to the SEC within four business days after the occurrence of the

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event to be disclosed. If the event occurs on a Saturday, Sunday or a day on which theSEC is closed, then this four business day period begins to run on the first businessday thereafter. One important exception to the general four business day rule concernsfilings made under Item 7.01 or Item 8.01 of Form 8-K solely to satisfy a company’sobligations under Regulation FD; any such filings must be made in accordance withthe requirements of Regulation FD, which may require disclosure of the event oneither a simultaneous or a prompt basis, depending on the circumstances. A secondexception applies to acquired company financial statements and pro-forma financialinformation required to be filed under Item 9.01 with respect to acquisitions reportedpursuant to Item 2.01; such statements and information may be filed either with theinitial report on Form 8-K disclosing the acquisition or by amendment not later than71 calendar days after the date that the initial report on Form 8-K is required to befiled.

The following items are reportable on a Form 8-K (selected items are discussed inmore detail below):

Section 1 – Business and Operations

Item 1.01 – Entry into or material amendment of a material definitive agreementnot made in the ordinary course.

Item 1.02 – Termination of a material definitive agreement other than upon itsscheduled expiration, where such termination is material to the company.

Item 1.03 – Bankruptcy or receivership.

Section 2 – Financial Information

Item 2.01 – Acquisition or disposition of a significant amount of assets (or abusiness) not in the ordinary course.

Item 2.02 – Results of operations and financial condition.

Item 2.03 – Creation of a direct, material financial obligation or a materialobligation under an off-balance sheet arrangement.

Item 2.04 – Triggering events that accelerate or increase a direct materialfinancial obligation or a material obligation under an off-balance sheet arrangement.

Item 2.05 – Restructuring costs associated with exit or disposal activities.

Item 2.06 – Material impairments to the company’s assets other than impairmentstaken in connection with the preparation, review or audit of financial statements to beincluded in the company’s next periodic report.

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Section 3 – Securities and Trading Markets

Item 3.01 – Notice of the delisting of a class of securities from a securitiesexchange, failure to satisfy a continued listing rule or standard, or transfer of theprincipal listing of a class of the company’s common equity.

Item 3.02 – Unregistered sales of equity securities constituting in the aggregatemore than 1% of the total outstanding securities of a class (or 5% for smaller reportingcompanies), which have not previously been disclosed in an Exchange Act filing.

Item 3.03 – Material modifications to the rights of security holders (for example,material amendments to a company’s organizational documents or issuances ormodifications of a class of securities that materially affects the rights of a differentclass).

Section 4 – Matters Related to Accountants and Financial Statements

Item 4.01 – A change in the company’s independent auditors.

Item 4.02 – Non-reliance on previously issued financial statements or on a relatedaudit report or a completed interim review.

Section 5 – Corporate Governance and Management

Item 5.01 – Change in control ofthe company, including anyarrangements that may result in achange of control in the future.

Item 5.02 – Departure ofdirectors or certain officers, theappointment of directors other than atan annual meeting of shareholders ora special shareholders’ meetingconvened for such purpose, theappointment of certain officers andthe entering into or modification ofcompensatory arrangements withcertain officers.

Item 5.03 – Amendments to a company’s organizational documents not proposedin a proxy statement or a change in the company’s fiscal year other than by a vote ofsecurity holders.

Practice Tip: An issuer need not file aForm 8-K to disclose information if theissuer has previously reported substantiallythe same information required by theForm 8-K on a registration statement underSection 12 of the Exchange Act or underthe Securities Act, a report under Section13 or 15(d) of the Exchange Act or adefinitive proxy statement or informationstatement under Section 14 of theExchange Act.

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Item 5.04 – Notice of blackout periods under certain types of employee benefitplans.

Item 5.05 – Specifiedamendments to the company’s codeof ethics applicable to the company’sprincipal executive, financial andaccounting officers, controller orpersons performing similar functions,or the approval of or failure to act inthe face of a material departure froma provision of such code of ethics.

Item 5.06 – Change in shellcompany status.

Item 5.07 – Submission ofmaters to a vote of security holders.

Section 6 – Asset-BackedSecurities

Items 6.01 through 6.05 – Disclosures relating to asset-backed securities.

Section 7 – Regulation FD

Item 7.01 – Disclosures of material non-public information pursuant toRegulation FD that the company elects to furnish on Form 8-K.

Section 8 – Other Events

Item 8.01 – Other optional disclosures of any events not otherwise called for bythe Form 8-K that the registrant deems of importance to security holders, includingdisclosure pursuant to Regulation FD that the registrant desires to file.

Section 9 – Financial Statements and Exhibits

Item 9.01 – Financial statements relating to business acquisitions described inresponse to Item 2.01 and exhibits required to be filed pursuant to Item 601 of RegulationS-K.

Practice Tip: Disclosure is not required ifthe company discloses the amendments orwaivers to the code of ethics on its Internetwebsite within four business days and hasdisclosed in its most recent annual report itsintent to provide such information in thatmanner. If the company elects thisalternative, it must maintain suchinformation on its website for at least 12months. Because of a NASDAQ listingrequirement, however, NASDAQ listedcompanies must still file a Form 8-K forwaivers to their code of ethics.

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Summary of Selected Items

Entry Into a Material DefinitiveAgreement (Item 1.01). Item 1.01requires a company to make certaindisclosures in the event that it:(i) enters into a material definitiveagreement not made in the ordinarycourse of its business; or (ii) entersinto a material amendment to such anagreement.6 For these purposes, a“material definitive agreement” is anyagreement, whether conditional orunconditional, that provides forobligations that are material to andenforceable against the company orfor rights that are material to thecompany and enforceable by thecompany. In general, a materialagreement would mean any agreement “to which there is a substantial likelihood that areasonable investor would attach importance in determining whether to purchase” theissuer’s securities.7 Upon entry into such material definitive agreement or amendment,the company is required to disclose the following information:

• the date on which the agreement was entered into or amended;

• the identity of the parties to the agreement or amendment;

• a brief description of any other material relationship between the companyor its affiliates and any of the other parties to the agreement; and

• a brief description of the material terms of the agreement or amendment.

Certain contracts, other than those immaterial in amount or significance, aredeemed to be material definitive agreements notwithstanding the fact that they aremade in the ordinary course of a company’s business. These contracts include: (i) any

6 A company may be required to disclose a material amendment even if it did not previously disclosethe underlying agreement (for example, if the amendment results in the agreement becoming a materialdefinitive agreement).

7 SEC Rule 405 under the Securities Act.

Practice Tip: The SEC has taken theposition that a material definitiveagreement must be summarized in thebody of the Form 8-K, even if it is filed asan exhibit to the Form 8-K.

Practice Tip: Compensatoryarrangements for directors and officers donot need to be disclosed under Item 1.01.Compensatory arrangements of certainexecutive officers, however, must bedisclosed under Item 5.02(e), as discussedin further detail below.

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contract upon which the company’s business is “substantially dependent;” (ii) anycontract calling for the acquisition or sale of any property, plant or equipment for aconsideration exceeding 15% of the fixed assets of the company on a consolidatedbasis; (iii) any material lease under which a part of the property described in thecompany’s registration statement is held; and (iv) certain agreements (other thancompensatory agreements) to which directors, officers, promoters, voting trustees,security holders named in the company’s registration statement or report, orunderwriters are parties.

Termination of a Material Definitive Agreement (Item 1.02). Item 1.02 of Form8-K requires a company to disclose the termination of any material definitiveagreement other than by expiration of the agreement on its stated termination date oras a result of all parties completing their obligations under the agreement. In the eventof any such termination, the company must disclose:

• the date of the termination;

• the identity of the parties to the agreement;

• a brief description of any other material relationship between the companyor its affiliates and any of the other parties;

• a brief description of the terms and conditions of the agreement that arematerial to the company;

• a brief description of the material circumstances surrounding thetermination; and

• any material early termination penalties incurred by the company.

The company need not make any disclosure as a result of negotiating ordiscussing the termination of a material definitive agreement; rather, the obligation tofile arises only when such an agreement has actually been terminated. If the registrantbelieves in good faith that a material definitive agreement has not been terminated, itneed not make any disclosures under Item 1.02 unless it has received a notice oftermination pursuant to the terms of the agreement. However, the SEC staff has takenthe position that if a company receives advance notice of termination of a materialdefinitive agreement from a counterparty (e.g., pursuant to a provision in theagreement requiring such advance notice), the company must file a Form 8-K underItem 1.02 even if it intends to negotiate with the counterparty and believes in good

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faith that the agreement will ultimately not be terminated. Similarly, receipt of a noticeof non-renewal of a material definitive agreement, which provides for renewal subjectto notice of non-renewal, will also trigger a filing obligation.

Acquisition or Disposition of a Significant Amount of Assets Not in the OrdinaryCourse (Item 2.01). Item 2.01 requires a company to disclose any acquisition ordisposition by it or any of its majority-owned subsidiaries of a significant amount ofassets. The information that must be disclosed regarding any such transaction includes,among other things:

• the date of completion of the transaction;

• a brief description of the assets involved;

• the identity of the person(s) from whom the assets were acquired or to whomthey were sold and the nature of any other material relationship betweensuch person(s) and the company or any of its affiliates;

• the nature and amount of consideration given or received for the assets; and

• in certain circumstances in which there is a material relationship between thecompany and the source of funds for the transaction, the identity of suchsource of funds.

An acquisition or disposition is deemed to involve a “significant amount of assets”if either of the following two conditions are met: (i) the company’s and its subsidiaries’equity in the net book value of such assets or the amount paid or received for the assetsupon such acquisition or disposition exceeds 10% of the total assets of the company, ona consolidated basis; or (ii) if it involves a business that is “significant” within themeaning of Regulation S-X. An acquisition or disposition need not be reported if it isbetween a company and one of its subsidiaries, or between two subsidiaries of acompany. Likewise, it is not necessary to report either the redemption or acquisition ofsecurities from the public or the sale or other disposition of securities to the public.

Practice Tip: Typically, a company will file a Form 8-K under Item 1.01 uponentering into a material definitive agreement to acquire or dispose of a significantamount of assets, and then later file a Form 8-K under Item 2.01 to report the closingof such acquisition or disposition. However, because Item 2.01 (unlike Item 1.01) islimited to transactions involving a significant amount of assets, it is possible that insome circumstances the company may not need to report the closing of an acquisitionor disposition made pursuant to an agreement previously reported under Item 1.01.

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Results of Operations and Financial Condition (Item 2.02). Item 2.02 requires acompany to furnish certain information regarding any release or public announcementthat discloses material non-public information regarding the company’s results ofoperations or financial condition for a completed quarterly or annual fiscal period(e.g., any earnings releases). Item 2.02 contains a limited exemption from thisrequirement where complementary earnings information is presented orally,telephonically, by webcast, by broadcast, by conference call, or by similar means. Inorder to take advantage of this exemption, the company must:

• provide the information as part of a presentation that is complementary to,and initially occurs within 48 hours after, a related written announcement orrelease that has been furnished on Form 8-K prior to the presentation;

• make the presentation broadly accessible to the public by dial-in conferencecall, webcast, broadcast or similar means;

• provide the financial and other statistical information contained in thepresentation on its website (this may take the form of an audio file of theinitial webcast, if applicable); and

• have announced the presentation by means of a widely disseminated pressrelease that included instructions as to how to access the presentation and thelocation on the company’s website where the financial and statisticalinformation would be available.

For a further discussion of best practices in relation to earnings releases,including practice tips on how to conduct an earnings call in compliance withapplicable regulations, please see the section of this handbook entitled “Regulation ofAnalyst Communications and Other Voluntary Disclosures.”

The information (and corresponding exhibits) furnished in a report pursuant toItem 2.02 will not be deemed to be “filed” for purposes of the Exchange Act unless thecompany specifically states that such information is to be considered “filed” orincorporates it by reference into a filing under the Securities Act or Exchange Act.Unlike information that is “filed,” information that is “furnished” is not: (i) subject tothe liability provisions of Section 18 of the Exchange Act; or (ii) automaticallyincorporated by reference into the company’s registration statements.

Costs Associated with Exit or Disposal Activities (Item 2.05). Item 2.05 requires acompany to make certain disclosures in the event that the board of directors or the

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officers of the company commit the company to an exit or disposal plan, or otherwisedispose of a long-lived asset or terminate employees under a plan of termination (ofthe type described in paragraph 8 of FASB Statement of Financial AccountingStandards No. 146 (now codified as Accounting Standards Codification Topic 420)),under which material charges will be incurred pursuant to generally acceptedaccounting principles (GAAP) applicable to the company. In such event, the companymust disclose, among other things, a description of the course of action, the facts andcircumstances leading to the expected action, the expected completion date, andestimates of the costs to be incurred in connection with the action and the amount ofthe charge that will result in future cash expenditures. If the issuer is unable to providean estimate at the time of filing, the issuer must file an amended report within fourbusiness days after it determines such estimate.

Non-Reliance on Previously Issued Financial Statements or a Related Audit Reportor Completed Interim Review (Item 4.02). Under Item 4.02, if a company’s board ofdirectors, a committee of the board, or authorized officers conclude that any previouslyissued financial statements should no longer be relied upon because of an error in suchfinancial statements, the company must generally disclose:

• the date that the conclusion regarding non-reliance was made;

• an identification of the financial statements that should no longer be reliedupon, and the reason(s) why this is the case; and

• a statement of whether the audit committee (or, in the absence of an auditcommittee, the board of directors or authorized officers) discussed thematters disclosed with the company’s independent accountant.

In the event that the company is advised by, or receives notice from, itsindependent accountant that disclosure should be made or action should be taken toprevent future reliance on a previously issued audit report or completed interim reviewrelated to previously issued financial statements, the company must disclose:

• the date on which the company was so advised or notified;

• an identification of the financial statements that should no longer be reliedupon;

• a brief description of the information provided by the accountant; and

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• a statement of whether the audit committee (or, in the absence of an auditcommittee, the board of directors or authorized officers) discussed thematters disclosed with the company’s independent accountant.

In the latter circumstance, the company must, no later than the date of the Form8-K filing, provide its independent accountant with a copy of these disclosures, requestthat the accountant promptly furnish a letter addressed to the SEC stating whether ornot it agrees with the statements made by the company, and thereafter amend theapplicable Form 8-K by filing the accountant’s letter as an exhibit no later than twobusiness days after the receipt of the letter.

Departure of Directors or Certain Officers; Election of Directors, Appointment ofCertain Officers; CompensatoryArrangements of Certain Officers(Item 5.02). Item 5.02 requires acompany to disclose various mattersrelating to the election and departureof directors and the appointment andcompensation of officers.

Directors. If a directorretires, resigns, or refuses tostand for re-election, the companyis generally required to disclosethe fact that such event occurred andthe date of the event. However, if the director’s resignation or refusal to stand forre-election is due to a disagreement with the company or the director is removed forcause, the company is required to: (i) describe the circumstances surrounding thedisagreement that it believes caused the director’s resignation, refusal to stand forre-election, or removal; (ii) file a copy of any written correspondence from the directorconcerning such circumstances; (iii) simultaneously provide the director with a copyof the foregoing disclosures and the opportunity to agree or disagree with thestatements contained therein; and (iv) file any letter received from the director inresponse within two business days of receipt.

Upon the election of a new director other than by a vote of security holders at ashareholders’ meeting, the company must disclose certain information, including,

Practice Tip: Disclosure underItem 5.02(b) is triggered by notice of thedirector’s intention to retire, resign orrefuse to stand for re-election. Disclosure isnot required solely by reason of discussionsor considerations of resignation, retirementor refusal to stand for re-election. Whethercommunications represent notice ordiscussions is a facts and circumstancesdetermination.

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among other things, the name of the new director, the date of his or her election and adescription of any arrangement or understanding between the new director and anyother person pursuant to which the director was elected.

Officers. In addition to disclosures relating to director retirements, resignations orrefusals to stand for election, issuers must disclose under this Item the retirement,resignation or termination of any of the following executive officers: (i) each of thenamed executive officers discussed in the section of this handbook entitled “ProxyStatement and Annual Report Disclosures and Process;” (ii) the president; (iii) theprincipal accounting officer; (iv) the principal operating officer; or (v) any personperforming similar functions.

A company also must disclose certain information upon appointing a newprincipal executive officer, president, principal financial officer, principal accountingofficer, principal operating officer or person performing similar functions. Theinformation that a company is required to disclose includes, among other things:

• the name and position of the newly appointed officer;

• the date of his or her appointment;

• certain information that would otherwise be required in the company’s proxystatement, including the officer’s relevant business experience and materialinterests in certain related person transactions involving the company; and

• a brief description of any material contract or arrangement entered into ormaterially amended and any award under such contract or arrangement, ineach case in connection with the appointment.

If the company intends to make a public announcement of the appointment of theofficer other than by means of filing a Form 8-K, the company may delay the filing ofthe Form 8-K disclosing the appointment until the day on which the publicannouncement is made.

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In the event the company entersinto, adopts, commences ormaterially modifies a materialcompensatory plan, contract orarrangement to which a “namedexecutive officer”8 of the company isa party, it is generally required todisclose a brief description of theplan, contract or arrangement and theamounts payable to the officerthereunder. Likewise, a companymust disclose any materialmodification to any material grant oraward issued under any such plan,contract or arrangement.

Lastly, if a payment, grant,award or other occurrence causes a

previously incalculable salary or bonus figure that was omitted from a proxy statementto become calculable, in whole or in part, such figure should be disclosed under thisItem.

Submission of Matters to a Vote of Security Holders (Item 5.07). Item 5.07requires disclosure of the results of any matter submitted to a shareholder vote withinfour business days of the date of the shareholders’ meeting at which the vote tookplace. With respect to any such matter, a public company is required to disclose thedate and type of the shareholders’ meeting at which the matter was voted upon (ifapplicable), the name of each director elected at such meeting (if applicable), a briefdescription of each other matter voted upon at the meeting, and the number of votescast for, against or withheld (as well as the number of abstentions and broker non-votes) with respect to each such matter, including a separate tabulation with respect toeach nominee for office.

8 We discuss the meaning of the term “named executive officer” in the section of this handbook entitled“Proxy Statement and Annual Report Disclosures and Process.” For purposes of Item 5.02, “namedexecutive officers” refers to those named executive officers for whom disclosure was required in thecompany’s most recent filing under the Securities Act or Exchange Act that required disclosure pursuantto Item 402(c) of Regulation S-K.

Practice Tip: Grants or awards madepursuant to a plan or arrangement that arematerially consistent with the previouslydisclosed terms of such plan orarrangement do not need to be disclosedunder this Item. Therefore, it is often notnecessary to separately disclose equitygrants or incentive awards made toexecutives pursuant to previously disclosedincentive plans. In that regard, a companydoes not need to disclose on Form 8-Kspecific performance targets or goals thatare adopted pursuant to a previouslydisclosed incentive bonus plan if thespecific performance targets or goals arematerially consistent with the previouslydisclosed terms of the plan.

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The requirement to report under Item 5.07 applies with respect to any mattersubmitted to a vote of security holders, through the solicitation of proxies or otherwise.Therefore, the requirement will apply even to matters voted upon at a meeting thatdoes not involve the election of directors.

Practice Tip: Issuers are required to report the preliminary voting results of theshareholders’ meeting with four business days of the meeting and final votingresults within four business days after such final results are known. However, anissuer does not need to report preliminary results if the final results are reportedwithin four business days of the meeting. The four business day period forreporting under Item 5.07 begins to run with the first day following the date onwhich the meeting ended.

Regulation FD Disclosure (Item 7.01). Item 7.01 provides for disclosure ofmaterial non-public information under Regulation FD. Regulation FD, which isdiscussed in greater detail in the section of this handbook entitled “Regulation ofAnalyst Communications and Other Voluntary Disclosures,” generally provides thatwhen a public company or person acting on its behalf discloses material non-publicinformation to certain persons, the company must also disclose such informationpublicly. Under Regulation FD, the required public disclosure may be made either byfiling or furnishing a Form 8-K, or, alternatively, by another method that is reasonablydesigned to result in broad disclosure to the public. Disclosures made under Item 7.01are generally deemed “furnished” and not “filed” for purposes of other filings thatincorporate by reference the company’s filings under the Exchange Act. In order toprovide for incorporation by reference, companies may disclose their Regulation FDdisclosures under Item 8.01.

Financial Statements and Exhibits (Item 9.01). Item 9.01 provides for the filingof certain required exhibits. Exhibits relating to material definitive agreements aregenerally not required to be filed with the Form 8-K. Instead, such exhibits, to theextent required to be filed under Item 601 of Regulation S-K, need only be filed withthe next quarterly or annual report for the relevant period. However, many companiesfile non-required exhibits with their reports on Form 8-K in order to qualify theForm 8-K disclosure by reference to more complete disclosures in the exhibit.

In addition to providing for the filing of required exhibits, Item 9.01 requires thedisclosure of acquired company audited historical financial statements in accordance

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with Item 3-05 of Regulation S-X and pro forma financial information in accordancewith Article 11 of Regulation S-X (in connection with acquisitions or dispositionsrequired to be disclosed under Item 2.01). In cases of acquisitions reported under Item2.01, such financial statements and information may be filed either with the initialreport on Form 8-K disclosing the acquisition or by amendment not later than 71calendar days after the date that the initial report on Form 8-K must be filed.

CONFIDENTIAL TREATMENT REQUESTS

Certain disclosures required by SEC regulations may contain information that thecompany believes would result in competitive harm to the company if disclosed. Forexample, the requirement to disclose the material terms of and to file a materialcontract might include pricing terms, technical specifications and other tradeinformation. Public companies are permitted to make a written objection to the publicdisclosure of any information contained in a filing required under the Exchange Act,including reports on Forms 10-K, 10-Q and 8-K, in accordance with the procedures setforth in Rule 24b-2 under the Exchange Act. Under this rule, the company is permittedto omit from the filed material the portion that it desires to keep undisclosed (the“confidential portion”). In lieu of the confidential portion, the company is required toindicate at the appropriate place that confidential information has been omitted andfiled separately with the SEC. In addition, the company must file a copy of theconfidential portion together with an application to the SEC making an objection to thedisclosure of the confidential portion. Upon receipt of such materials, the SEC willmake a determination as to whether to sustain the company’s objection.

Rule 24b-2 sets forth the criteria for obtaining confidential treatment ofinformation under the Exchange Act. The rule incorporates the criteria fornon-disclosure of confidential information consistent with the exemptions fromdisclosure under the Freedom of Information Act (FOIA) and the SEC’s FOIA rules.The most typical exemption involves “trade secrets and commercial or financialinformation obtained from a person that is privileged or confidential.”9

Requests for confidential treatment must include a factual analysis of the basis forthe exemption requested and a legal analysis for why the request falls under theapplicable exemption, including, where necessary, citation to case law. Companiesshould avoid conclusory statements and must identify and address each portion of the

9 5 U.S.C. 552(b)(4); 17 CFR 200.80(b)(4).

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disclosure for which it is requesting confidential treatment. In addition, companiesmust specify a duration for the confidential treatment and provide an analysissupporting the requested duration. Lastly, companies must consent to the release of theconfidential information to “other government agencies, offices or bodies and to theCongress.”10 For a more detailed discussion of the requirements for a confidentialtreatment request, including the process involved, see the Division of CorporationFinance, Staff Legal Bulletin No. 1, dated February 28, 1997 (with Addendum datedJuly 11, 2001).

On September 28, 2010, the SEC’s Office of Inspector General issued a finalreport on its assessment of the Division of Corporation Finance’s confidentialtreatment processes and procedures. The report contains eight recommendationsthat were developed to strengthen the processes and procedures used by the SECin evaluating, approving and monitoring confidential treatment requests. TheSEC agreed with four of the recommendations, partially agreed with three othersand did not concur with one of the recommendations. The report may result ingreater scrutiny being applied to confidential treatment requests, particularlywhere companies use declarative statements and boilerplate language to justifytheir requests.

DISCLOSURE CONTROLS AND PROCEDURES

In addition to the SOX certifications that the principal executive officer andprincipal financial officer must make at least every quarter in connection with thecompany’s periodic reports, companies must maintain disclosure controls andprocedures to ensure that: (i) information required to be disclosed by the company inits Exchange Act reports is recorded, processed, summarized and reported accuratelyand on a timely basis; and (ii) information is accumulated and communicated tomanagement, including the executive officers, as appropriate to allow timely decisionsregarding such required disclosures. Moreover, as described above with respect toItem 9A of the Form 10-K and Part I, Item 4 of the Form 10-Q, companies must on aquarterly basis evaluate the effectiveness of their disclosure controls and proceduresand disclose their conclusions of that evaluation in their periodic SEC reports.

10 Rule 24b- 2(b)(2)(iii).

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To help maintain the disclosure controls and procedures, companies are advisedto establish a disclosure committee consisting of key individuals in the company, suchas the chief financial officer, controller, general counsel, securities counsel, investorrelations officer and internal auditor. Although the establishment of a disclosurecommittee was recommended by the SEC as part of its rulemaking under Sections 906and 302 of SOX, it is not required under SEC rules. Companies may adopt a writtencharter setting forth the duties and responsibilities of the disclosure committee.Companies also may request that the members of the committee and other members ofmanagement execute sub-certifications that the principal executive and financialofficers may rely on in making their certifications under Sections 906 and 302. Foradditional discussion of disclosure controls and procedures, see the section of thishandbook entitled “The Sarbanes-Oxley Act.”

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PROXY STATEMENT AND ANNUAL REPORTDISCLOSURES AND PROCESS

A company’s annual proxy statement provides shareholders with informationregarding matters to be voted on at the company’s annual shareholders’ meeting,solicits proxies of shareholders to make voting at the meeting more convenient, andprovides information about the company’s corporate governance and compensationpolicies and related matters, including the information required by Part III of Form10-K. The purpose of the proxy disclosures is to enable shareholders to make informedvoting and investment decisions.

Each public company that is not a foreign private issuer is required to prepare andfile its proxy statement on Schedule 14A in compliance with the rules of Regulation14A and the relevant sections of Regulation S-K. In addition, the company’s stockexchange may impose additional requirements on the information to be included in theproxy statement.

OVERVIEW OF ANNUAL PROXY STATEMENT DISCLOSURE REQUIREMENTS

A proxy statement for a company’s annual meeting of shareholders will generallyinclude the following items:

The Notice. A notice about the meeting and the items to be voted on.

General Information. Information about the meeting, including where and whenit will be held and how shareholders can vote.

Directors and Officers. Identification of the company’s directors and officers,including biographical information relating to their board service on public companiesand other relevant experience. Under recent rule amendments, companies are nowrequired to disclose, for each director and any nominee for director, the particularexperience, qualifications, attributes or skills that led the board to conclude that theperson should serve as a director of the company. In addition, companies are nowrequired to disclose any prior directorships of public companies or registeredinvestment companies held by directors or nominees within the past five years.

Director Elections. Identification of the company’s proposed nominees fordirectors to be voted on at the meeting.

Corporate Governance. Corporate governance matters, including disclosuresregarding the independence of the board, the duties of board committees, boardattendance, the existence of a code of ethics, descriptions of the policies regarding

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shareholder nominations of directors and shareholder communications to the board andcertain legal proceedings involving directors and officers.

Board leadership structure and role in risk oversight. Under recent amendmentsto Item 407 of Regulation S-K, a company must describe the leadership structure of itsboard and why the company has determined that its leadership structure is appropriategiven its specific characteristics or circumstances. If one person serves as bothprincipal executive officer and chairman, the company is required to disclose whetherit has a lead independent director, and, if so, what role such independent director playsin the leadership of the board. In addition, a company must disclose the extent of theboard’s role in the risk oversight of the company and the effect that this has on theboard’s leadership structure.

Board Diversity. Companies are required to disclose whether, and if so, how thenominating committee or board considers diversity in identifying nominees fordirector. If the nominating committee or board has a policy with regard to theconsideration of diversity, disclosure is required of how this policy is implemented, aswell as how the effectiveness of the policy is assessed. The SEC recognizes thatdifferent companies have differing definitions of diversity, and that for somecompanies diversity includes differences of viewpoint, professional experience,education, skills and other qualities and attributes, while other companies focus ondiversity concepts such as race, gender and national origin.

Potential conflicts of interest involving compensation consultants. Under recentSEC rule amendments, a public company is now required to disclose the fees paid to acompensation consultant and its affiliates if the board or management has engaged thecompensation consultant to provide advice with respect to the compensation ofdirectors and executives, and such consultant or its affiliates provided other non-executive compensation consulting services to the company that generated fees inexcess of $120,000 during the company’s last fiscal year. Disclosure will generally notbe required if the board and management have retained different compensationconsultants, provided that the board’s consultant does not provide additional non-executive compensation consulting services to the company. In addition, the Dodd-Frank Act imposes additional disclosure requirements regarding the independence of,and potential conflicts of interest involving, compensation consultants. The newrequirements apply to any proxy or consent solicitation material for an annualshareholder meeting occurring on or after July 21, 2011. For additional information,

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see the section of this handbook entitled “The Dodd-Frank Wall Street Reform andConsumer Protection Act – Independence of Compensation Consultants and other Advisors.”

Independent Auditors. Companies must disclose all audit fees billed for each ofthe last two fiscal years and describe the services provided by their auditors under thecategories of audit fees, audit-related fees, tax fees and all other fees. Companies mustalso disclose the audit committee’s pre-approval policies and procedures with respectto non-audit fees. In addition, while SOX generally requires the audit committee of theboard of directors to appoint the independent auditors, most companies will ask theirshareholders to ratify this appointment.

Practice Tip: The fees to be disclosed pursuant to this requirement are those billedby the auditors for services during each of the last two fiscal years, not the actualpayments made during such fiscal years.

Audit Committee Report. The audit committee of the company’s board ofdirectors is required to make certain disclosures relating to the audited financialstatements of the company, including that it has discussed the audited financialstatements with management and recommended their inclusion in the company’sAnnual Report on Form 10-K.

Other Company Proposals. The most common proposals by companies, otherthan for the ratification of auditors and the election of directors, involve the adoptionor amendment of equity incentive plans and other incentive compensation plans. Ifthere are any proposals other than those relating to the election of directors, ratificationof the company’s auditors, qualified shareholder proposals or incentive compensationplan proposals, the company must file a preliminary version of the proxy statement atleast 10 days before filing the final, definitive version of its proxy statement. Duringthis 10-day period, the SEC staff may comment on the preliminary version, potentiallyrequiring changes to the disclosures in the proxy statement.

Shareholder Proposals. Shareholders may seek to include their proposals in thecompany’s proxy statement by following the requirements of SEC Rule 14a-8, whichare discussed in more detail below.

Equity Compensation Plan Information. Unless they have disclosed theinformation in their Annual Reports on Form 10-K, companies must disclose certaininformation relating to their equity compensation plans, including how many shares

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are subject to outstanding awards and how many shares are available for issuancepursuant to new awards. This table is also required if the company is proposing toadopt or amend an equity compensation plan.

Compensation Discussion and Analysis (CD&A). The company is required todiscuss the reasons why it pays the compensation it pays to certain of its executiveofficers called named executive officers, and to describe the process it takes indetermining the compensation it pays. This requirement is discussed in more detailbelow.

Compensation Committee Report. The compensation committee must reportthat it has discussed the CD&A with management and recommended its inclusion inthe company’s proxy statement.

Compensation Policies and Practices that Present a Material Risk to theCompany. Under recently added Item 402(s) of Regulation S-K, to the extent that acompany’s compensation policies and practices for its employees are reasonably likelyto have a material adverse effect on the company, the company must disclose itscompensation policies and practices as they relate to risk management practices andrisk-taking incentives. This disclosure requirement does not apply to smaller reportingcompanies.

Practice Tip: Companies should engage in an appropriate compensation riskassessment in order to support their conclusion (which will typically be the case)that their compensation policies and practices are not reasonably likely to have amaterial adverse effect. In proxy statements for the first proxy season thataddressed this new disclosure requirement, many companies disclosed the processfor their compensation risk assessment. In cases where companies do not includedisclosure, the SEC typically asks for an explanation of the company’s process fordetermining that no disclosure is required. In addition, RiskMetrics’ position is thatcompanies should include disclosures regarding compensation and risk assessment.The SEC Staff has recommended that the Item 402(s) disclosure be presentedtogether with, but not as part of, the company’s compensation disclosures. Giventhat the say-on-pay vote is with respect to executive compensation, as disclosed,the Item 402(s) disclosure should not be included as part of the CD&A.

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Executive Compensation and Non-Employee Director Compensation. Companiesmust provide specific tabular and narrative disclosure relating to their compensation ofthe named executive officers and of their directors. These requirements are discussed inmore detail below.

Beneficial Ownership Table. Companies must disclose how many shares oftheir voting securities are beneficially owned by their directors, named executiveofficers, known beneficial owners of more than 5% of any class of such votingsecurities, and all executive officers and directors as a group. Beneficial ownership isdetermined in accordance with Rule 13d-3 under the Exchange Act, and rests onwhether a holder has or shares the power to vote the securities or investment powerover the securities, including the power to dispose of them. Persons are deemed tobeneficially own any securities that they have the right to acquire within 60 days (forexample, pursuant to options, warrants, convertible securities or other agreements).

Related Person Transactions. Companies must disclose certain materialtransactions involving more than $120,000, in which the company is a participant andin which certain related persons have a material interest. This requirement is discussedin more detail below.

Section 16(a) Compliance. Companies must disclose if they are aware of anydirector, executive officer or greater than 10% beneficial owner who failed to timelyfile an insider report on Form 3, 4 or 5 since the beginning of the most recentlycompleted fiscal year.

Form of Proxy Card. The proxy card provides shareholders with the ability tovote without being physically present at the meeting. The card must provideshareholders with the ability to withhold votes for directors, to vote for or againstproposals or to abstain from voting on any matter.

SUMMARY OF SELECTED ITEMS

Executive and Director Compensation

Pursuant to Item 402 of Regulation S-K, public companies other than foreignprivate issuers, must disclose certain basic information about the compensation theypay to non-employee directors and certain executives called the named executiveofficers. The disclosure requirements include compensation tables and narrativedisclosure of all elements of compensation, whether in cash, equity incentive planawards, perquisites or other forms of compensation. Smaller reporting companies havereduced disclosure requirements under this Item.

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The main elements of the executive compensation disclosures that apply to thenamed executive officers, in addition to the Compensation Discussion and Analysissection, are as follows:

• a summary compensation table showing all compensation paid or earned inrespect of the fiscal year (which is discussed in greater detail below);

• a table showing all grants of plan-based awards during the fiscal year,including equity awards and non-equity incentive bonuses;

• a table showing the outstanding equity awards as of the end of the last fiscalyear;

• a table showing all option exercises and stock awards that vested during thefiscal year;

• a table and narrative describing earned pension benefits;

• a table and narrative describing any nonqualified deferred compensationarrangements, accounts and contributions; and

• a table and narrative describing any arrangements or agreements to paycompensation to the named executive officers upon their termination or upona change in control of the company.

The required disclosures for non-employee directors include a table similar to thesummary compensation table showing all compensation earned or paid in the fiscalyear (e.g., director fees and equity awards), identification of all outstanding optionawards at fiscal year end, and a narrative description of all factors necessary tounderstand the disclosures in the table, including a description of each arrangementunder which compensation is paid.

Determination of Named Executive Officers. The following executive officersare the named executive officers for whom compensation disclosure is required underSEC rules:

• any principal executive officer serving during the most recently completedfiscal year (usually the CEO);

• any principal financial officer serving during the most recently completedfiscal year (usually the CFO);

• the three highest paid executive officers (other than the principal executiveand principal financial officers) serving at the end of the most recentlycompleted fiscal year; and

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• up to two additional individualswho served as executive officersduring the most recentlycompleted fiscal year, if theywould have been among the threehighest paid officers except forthe fact that they were no longerserving as executive officers atthe end of the most recentlycompleted fiscal year.

The determination of the named executive officers other than the principalexecutive and financial officers should be based on the total compensation that would bedisclosed for such executive officers in the summary compensation table, less theamounts disclosed in the Change in Pension Value and Nonqualified DeferredCompensation Earnings column. The summary compensation table is discussed ingreater detail below.

Practice Tip: Special attention should be paid to severance benefits paid to or earnedby executive officers who are not serving at the end of the fiscal year. Because thesummary compensation table requires disclosure of all paid and earnedcompensation, the payment of severance benefits upon termination of an executiveofficer can cause such officer to be among the highest paid executive officers even ifhis or her compensation would otherwise not have resulted in the officer being anamed executive officer.

Compensation Discussion and Analysis. The Compensation Discussion andAnalysis section (better known as the CD&A) is a relatively new requirement thatbecame effective for proxy statements filed on or after December 15, 2006, whichincluded executive compensation disclosures with respect to a fiscal year ending on orafter such date. The CD&A replaced a previously required report by the compensationcommittee and requires a discussion of how the compensation committee of the boardof directors determined the compensation paid to each named executive officer for themost recent fiscal year, including the committee’s philosophy and objectives inmaking compensation decisions. As set forth in Item 402(b) of Regulation S-K, theCD&A should discuss the following areas:

• the objectives of the company’s compensation program;

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Practice Tip: If a principal executiveofficer or principal financial officerserved during only part of the fiscalyear, such officer is a named executiveofficer for such fiscal year. Therefore, itis possible that both current and formerprincipal executive and financialofficers can be named executive officersin a given fiscal year.


• what the compensation program is designed to reward;

• each element of compensation;

• why the company chooses to pay each element;

• how the company determines the amount (and, where applicable, theformula) for each element to pay; and

• how each compensation element and the company’s decisions regarding thatelement fit into the company’s overall compensation objectives and affectdecisions regarding other elements.

The CD&A is a narrative that is meant to put the compensation disclosures madeelsewhere in the proxy statement into context. Therefore, the CD&A should analyzeand not merely repeat what compensation is paid. For example, the CD&A shoulddiscuss: (i) how and why the amounts and types of compensation were paid; (ii) howcompensation is linked to performance and how performance targets were set; (iii) theroles of the compensation committee, management and outside consultants inrecommending and determining the types and amounts of compensation to pay; and(iv) if peer companies were used for benchmarking, the names of such companies andhow they were selected.

Many companies pay cash bonuses under non-equity incentive plans that specifyparticular performance targets that must be met in order for the executives to receivevarious levels of payout under the plans. Companies that use this approach mustdisclose in the CD&A the specific targets that were used for the most recentlycompleted fiscal year, unless doing so would cause competitive harm. The SEC has,however, objected to attempts bysome companies to omitperformance targets on the basis ofcompetitive harm. Companies thatdo omit specific performancetargets must provide a descriptionof how difficult the undisclosedtargets are to achieve. Such companies should also be prepared to provide the SEC withan analysis of the potential competitive harm; such analysis should be substantiallyequivalent to the type of analysis which would be required to obtain confidentialtreatment of any other required Exchange Act disclosure (as discussed in more detailabove in the “Confidential Treatment Requests” part of this section of this handbook).

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Practice Tip: Performance targets need notbe disclosed for future fiscal years unlesssuch disclosure is necessary to anunderstanding of the compensation paid inthe most recently completed fiscal year.


Summary Compensation Table. The summary compensation table, the form ofwhich is copied below, should disclose all compensation paid to or earned by thenamed executive officers in respect of the most recently completed fiscal year.Specifically, companies must disclose for each of the last three fiscal years withrespect to the named executive officers:

• their annual salaries;

• their discretionary cash bonuses (that is, bonus amounts that were not paidpursuant to a previously-adopted plan);

• the grant date fair value of stock awards and option awards made during themost recently completed fiscal year;

• their non-equity incentive plan compensation (including performance-basedbonuses);

Practice Tip: The compensation for executives who were not previously namedexecutive officers does not need to include any years prior to the year in which theybecame a named executive officer.

• changes in the value of their pension benefits and above-market earnings ondeferred compensation; and

• the value of perquisites, termination payments, and all other compensationpaid or that became payable to them in the fiscal year.

FORM OF SUMMARY COMPENSATION TABLE

Name andprincipal position Year

Salary($)

Bonus($)

StockAwards

($)

OptionAwards

($)

Non-EquityIncentive PlanCompensation

($)

Change inPension

Value andNonqualified

DeferredCompensationEarnings ($)

All OtherCompensation

($)Total

($)

Principal ExecutiveOfficer

Principal FinancialOfficer

A....

B....

C....

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Shareholder Proposals

Subject to certain exceptions, a company must include in its proxy statement ashareholder’s proposal if the shareholder satisfies the following requirements:

• the shareholder has continuously held for at least 1 year by the date itsubmits the proposal no less than $2,000 in market value, or 1%, of thesecurities entitled to be voted at the meeting;

• the shareholder must continue to hold such securities through the date of themeeting;

• the shareholder must submit the proposal by the deadline provided in Rule14a-8, which for annual meetings will normally be 120 days prior to theanniversary of the mailing of the prior year’s annual proxy statement. Forother meetings of shareholders, the deadline is a reasonable time before thecompany begins to print and send its proxy materials; and

• the shareholder or its duly qualified representative must attend the meetingto present the proposal.

A shareholder may only submit one proposal for each meeting, which proposal(including any accompanying supporting statement) may not exceed 500 words. Ashareholder must follow state law with respect to the procedures for attending themeeting and presenting its proposal.

Companies may exclude a shareholder proposal from their proxy statements if theshareholder fails to satisfy the procedural requirements set forth above or if one ormore of the following bases for excluding the proposal applies:

• if the proposal is not a proper subject for shareholder action under the lawsof a company’s jurisdiction of organization;

Practice Tip: Many proposals are not proper subjects for shareholder action underapplicable corporate laws if they would require the company’s board of directors totake action in an area where the law vests the power to take such action in theboard and not the shareholders. Shareholders often avoid this problem by writingtheir proposals as a recommendation to or request of the board, rather than arequirement. In addition, proposals requiring an amendment to the company’scharter may be improper under applicable corporate laws if board action is requiredfor such amendment, while proposals to amend the company’s bylaws generallyare not improper.

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• if the proposal would cause the company to violate any applicable state,federal or foreign law;

• if the proposal or supporting statement violates the proxy rules, including theantifraud provisions;

• if the proposal deals with a matter relating to the company’s ordinarybusiness operations;

Practice Tip: Proposals are excludable under this basis where the proposal relatesto tasks fundamental to management’s ability to run the company, involvesintricate details or seeks to implement complex policies. Proposals are generallynot excludable on this basis where the proposals relate to social policy issues, raisesignificant policy considerations, or involve CEO succession planning or executivecompensation matters.

Where a proposal relates to environmental, financial or health risks, companieshave historically been able to exclude the proposal on this basis if it focused on thecompany’s internal evaluation of the risks that it would face as a result of itsoperations, rather than if the proposal focused on a company minimizing oreliminating its operations that affect the environment or public health. The SEC,however, issued guidance on October 27, 2009 stating that going forward it willfocus on whether the actual subject matter to which the risk pertains or which givesrise to the risk involves a matter of ordinary business to the company or if it“transcends the day-to-day business matters of the company and raises policyissues so significant that it would be appropriate for a shareholder vote.” See StaffLegal Bulletin 14E. This new focus should make it more difficult for companies toexclude proposals relating to climate change and other environmental matters.

• if the proposal relates to a personal claim or interest or is designed to resultin a benefit which is not shared by the other shareholders;

• if the proposal relates to operations which account for less than 5% of thecompany’s total assets, sales and earnings and is not otherwise significantlyrelated to the company’s business;

• if the company would lack the power to implement the proposal;

• if the proposal relates to director elections, including the procedures fornominating or electing directors (but see the amendment to Rule 14a-8(i)(8),which is discussed below in the “Recent Development – Final Proxy AccessRule” part of this section);

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• if the proposal directly conflicts with a management proposal orsubstantially duplicates another proposal by another shareholder;

• if the company has substantially implemented the proposal;

• if the proposal is a resubmission of a proposal that was submitted within thepast 5 years, which did not receive certain threshold levels of support; or

• if the proposal relates to specific amounts of stock or cash dividends.

If the company intends to exclude a proposal, it must file its reasons with the SECat least 80 days before it files its definitive proxy statement. To exclude a proposal onthe basis that it is not a proper subject for shareholder action or would violateapplicable laws, companies are generally required to submit a legal opinion. In allcases, the burden is on the company to prove that it has a justifiable basis forexcluding the shareholder proposal.

Related Person Transactions

Under Item 404 of Regulation S-K, companies are required to discloseinformation about certain transactions involving “related persons” and the company orany of its subsidiaries, and to describe their policies relating to the review, approvaland ratification of such related person transactions. A “related person” generallyincludes any of the following persons:

• any director or nominee for director;

• any executive officer;

• any beneficial owner of more than 5% of a class of the company’s votingsecurities; or

• any immediate family member of any such director, nominee, executiveofficer or beneficial owner.

Disclosure is required for any transactions, arrangements or relationships thatmeet the following criteria:

• the transaction occurred or has continued since the beginning of thecompany’s most recently completed fiscal year (including during the periodof time after the completion of such fiscal year), or is a currently proposedtransaction;

• in which a related person had or will have a director or indirect materialinterest;

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• in which the amount involved exceeds $120,000; and

• in which the company or any of its subsidiaries was or is to be a participant.

Related person transactions include transactions in which a related person hasonly an indirect material interest. For example, if a director is an executive officer of athird party that does business with the company, the transactions with the third partymay need to be disclosed. However, the SEC has provided a safe harbor fortransactions in which the interest of the related person is limited to the person being adirector and/or less than 10% equity owner of the third party engaging in transactionswith the company.

If a transaction must be disclosed, the company must generally disclose thefollowing information about such transaction:

• the identity of the related person and such person’s interest in thetransaction;

• the approximate dollar value of the transaction and of the related person’sinterest in the transaction; and

• any other information that would be of material interest to shareholders.

Certain transactions require disclosure of additional information. For example, fortransactions involving loans, the company must disclose the largest amountoutstanding during the relevant period and all interest and principal payable duringsuch period.

RECENT DEVELOPMENT – FINAL PROXY ACCESS RULE

Current SEC rules allow a company to deny shareholders access to the company’sproxy statement to propose their own director nominees or to make other proposalsrelating to the nomination or election of directors. In late 2009, the SEC proposed anew rule, which was adopted in final form on August 25, 2010, to give shareholdersaccess to the proxy statements (and proxy cards) of public companies for thesepurposes. The new proxy rules were delayed in part due to concerns regarding theSEC’s statutory authority to adopt such rules. Section 971 of the Dodd-Frank Actexpressly provided the SEC with such authority. See the section of this handbook titled“The Dodd-Frank Wall Street Reform and Consumer Protection Act – Proxy Access.”

The SEC’s final rule, as adopted, adds a new Rule 14a-11 under the ExchangeAct and amends certain related rules, including Rule 14a-8. Rule 14a-11 gives

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shareholders the right, under certain circumstances, to include a nominee or nomineesfor director in a public company’s proxy materials. Rule 14a-8, as amended, willfacilitate access to the company’s proxy materials for the purpose of proposingchanges to the procedures for nominating directors. The rules adopted on August 25,2010 are similar to the proposed rules from 2009, with certain important changes thatare discussed below.

The new proxy rules were to become effective with respect to most issuers 60days from the date of publication in the Federal Register, (or November 15, 2010). Theapplication of the rule to smaller reporting companies was delayed for three years. OnSeptember 29, 2010, however, the U.S. Chamber of Commerce and BusinessRoundtable petitioned the U.S. Court of Appeals for the District of Columbia Circuitto vacate Rule 14a-11 and its requirements as unlawful under the Investment CompanyAct, the Exchange Act and the Administrative Procedures Act, and at the same timerequested that the SEC stay the effectiveness of the rule pending resolution of theCourt of Appeals petition. In response, on October 4, 2010, SEC stayed the effectivedate of the new proxy rules, including Rule 14a-11 and the amendments to Rule 14a-8,pending the resolution of the Court of Appeals petition.

Scope of Shareholder Access to Proxy Materials

Rule 14a-11 requires certain public companies to include shareholdernominations for directors in their annual proxy statements. With certain exceptions,the rule applies to most Exchange Act reporting companies, including investmentcompanies, controlled companies, voluntary filers, smaller reporting companies andnon-U.S. domiciled issuers that are not foreign private issuers. Foreign private issuersremain exempt from all U.S. proxy rules, including Rule 14a-11.

Shareholder Requirements to Use Rule 14a-11

Only certain shareholders are allowed to submit shareholder nominations for theboard of directors. To submit nominations, a shareholder or shareholder group must:

• collectively own at least 3% of the voting shares of the company;

• have held the requisite percentage continuously for at least three years at thetime of providing notice to the company of its intent to use Rule 14a-11; and

• provide notice of its intent to use Rule 14a-11 by filing a Schedule 14N withthe Securities and Exchange Commission at least 120 days and no earlierthan 150 days prior to the anniversary of the mailing of the prior year’sproxy statement.

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Practice Tip: The SEC amended Rule 13d-1 to clarify that a shareholder orshareholder group that beneficially owns more than 5% of a class of voting securitiesof a company, and which is otherwise eligible to report its ownership onSchedule 13G, will not lose its Schedule 13G eligibility solely as a result ofnominating one or more director candidates pursuant to Rule 14a-11. This exemption,however, applies solely to activities in connection with a nomination underRule 14a-11. Other activities, including activities taking place upon the election of anominee proposed through Rule 14a-11, are not eligible for this exemption.

Information to be included in Schedule 14N. Schedule 14N requires thenominating shareholder or shareholder group to disclose or certify certain informationrelated to its share ownership and intentions, including:

• disclosing the percentage of shares entitled to be voted by the shareholder orshareholder group;

• disclosing the period of time such shares have been held by the shareholderor each member of the shareholder group;

• biographical and other information about the shareholder or shareholdergroup and the shareholder nominee or nominees, similar to the disclosurerequired in a contested election;

• certifying the intent of the shareholder or shareholder group to hold sharesthrough the date of the shareholders’ meeting at which the directors are to beelected; and

• certifying that the shareholder or shareholder group is not holding stock forthe purpose of changing control of the company or to gain more than themaximum number of nominees that the company could be required toinclude under Rule 14a-11.

The shareholder or shareholder group would be entitled to a statement in supportof each shareholder nominee, not to exceed 500 words per nominee. A company thatreceives a notice on Schedule 14N from an eligible shareholder or shareholder groupwould be required to include in its proxy statement disclosure concerning thenominating shareholder or shareholder group and the shareholder nominee ornominees, and include on its proxy card the names of the shareholder nominees.

Nominating Shareholders Must File Schedule 14N. As stated above, a nominatingshareholder or shareholder group must provide notice of its intent to use Rule 14a-11

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by filing a Schedule 14N with the SEC at least 120 days and no earlier than 150 daysprior to the anniversary of the mailing of the prior year’s proxy statement. New Rule14a-5(e)(3) requires that a company provide in a proxy statement the deadline forsubmitting nominees for inclusion in the proxy materials of the next annual meeting ofshareholders. However, if a company moves its meeting date more than 30 days fromthe meeting date of the previous year, the company must file a Form 8-K within fourdays of determining the meeting date and disclose the date by which a shareholder orshareholder group must provide its Schedule 14N notice. The Schedule 14N should bedelivered to the company concurrently with filing the schedule with the SEC.

Practice Tip: Rule 14a-11 does not permit companies to opt out of the rule. To theextent that shareholders have the right to nominate directors at meetings ofshareholders, Rule 14a-11 enables shareholders access to the company’s proxystatement to include the shareholders’ nominees. However, the rules does notpreclude a company’s constituent documents from establishing eligibilityrequirements for shareholder nominees that do not discriminate against proxy accessnominees. Any such eligibility requirements would need to be permissible under thegoverning state law.

Limitations on the Use of Rule 14a-11

Rule 14a-11 is not intended to allow shareholders or shareholder groups access tothe company’s proxy statement in order to take control over a company. Therefore, inaddition to requiring the nominating shareholder or shareholder group to certify onSchedule 14N that it is not holding the company’s stock with the purpose of bringingabout a change of control of the company, Rule 14a-11 specifically limits the maximumnumber of director positions that can be filled through shareholder nominees.

The total number of nominees from all shareholders that may be elected inreliance on Rule 14a-11 is limited to nominees that would represent 25% of thecompany’s board of directors or one shareholder nominee, whichever is greater.Generally, shareholder nominees elected to the board through methods outside ofRule 14a-11 would not count towards the maximum limitation.

Excluding Shareholder Nominations from Proxy Materials. Public companiesmay exclude shareholder nominations if the shareholder fails to satisfy the proceduralrequirements set forth above. The nominee must also satisfy the objectiveindependence standards of any national securities exchange or national securities

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association that are applicable to a company’s directors. Nominees are not subject toany other independence or qualification standards that may apply to the directors of aparticular company, though a shareholder or shareholder group must disclose in theproxy materials whether it believes the nominee satisfies such company standards. If acompany is unsure whether a shareholder nominee may be excluded, the companymay solicit the opinion of the SEC and request a no-action letter.

Amendments to Rule 14a-8

Among the traditional reasons that a public company could reject a shareholderproposal was if the proposal would relate to a nomination or election of the board ofdirectors or a procedure for such nomination or election, including proposed changes toa company’s governing documents that addressed the election process (for example, achange in the advance notice provisions in a company’s bylaws). In conjunction withnew Rule 14a-11, Rule 14a-8(i)(8) has been amended to delete the exception thatallowed a company to reject shareholder proposals concerning procedures forshareholders’ director nominees. As amended, Rule 14a-8(i)(8) allows shareholderproposals that augment or supplement Rule 14a-11 nominations, such as by lowering theholding period or otherwise relating to the procedure for nominating or electingdirectors. The amended Rule 14a-8(i)(8) would still allow a company to reject proposalsthat, among other things, would question the competence or decisions of directors ordirector nominees, would remove a director from office before his or her term expired,or would affect the outcome of an upcoming election of directors. In addition, Rule 14a-8 is not available for proposals seeking to submit a specific individual for election asdirector in the proxy materials. Such proposals may be submitted only under and incompliance with Rule 14a-11 or through other permitted avenues.

ANNUAL MEETINGS – THE SOLICITATION AND VOTING PROCESS

The local laws of a company’s jurisdiction of organization will determine therequirements for a company’s annual meeting of shareholders. In general, however,the annual meeting process for most public companies is similar and includes thefollowing elements:

• Companies must set a record date to determine who can vote at the meetingand, therefore, who should receive the proxy materials.

• Companies must run a broker search at least 20 business days before therecord date in order to identify which banks, brokers and other nominees holdshares for their shareholders who hold unregistered shares in “street name.”

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• Companies register with the Depository Trust Company (DTC), whosenominee holds all of such street shares, and who will then pass its rightsdown to the individual banks, brokers and nominees, who in turn will passtheir rights on down to the individual street holders.

• Companies traditionally held their shareholders’ meeting about 30 days aftermailing the proxy statements and other proxy materials (such as the proxycard and glossy annual report) to their shareholders. Under the SEC’sE-Proxy rules, however, companies may mail only a notice to theirshareholders about the annual meeting, which describes how theirshareholders may access the complete set of proxy materials on the Internetor request a paper copy of such materials. If a company chooses this option,it must complete the mailing of these Notices of Internet Availability at least40 days prior to the date of the meeting.

• Companies should generally have available at their annual meetings:(i) affidavits of mailing of the proxy materials; (ii) the DTC position reportshowing the banks, brokers and other nominees holding shares in thecompany; (iii) the registered shareholder list; (iv) a meeting agenda; (v) rulesof conduct for shareholders present at the meeting; and (vi) ballots for anyonewho wishes to vote in person. The secretary and chairman of the meeting willoften follow a written script prepared in advance of the meeting. In mostcases, companies should appoint an inspector of elections to tabulate thevotes; the inspector should sign a formal written oath and provide a writtenreport of the votes. After the meeting, the company should prepare minutes forthe meeting, which should be filed in the corporate records.

ANNUAL REPORTS TO SHAREHOLDERS

The annual report to shareholders is an investor document, usually in a glossybinding. The report must comply with the disclosure requirements set forth in Rule14a-3(b) and also include certain disclosures by the stock exchange on which thecompany’s securities are listed. Under Rule 14a-3(a), no solicitation of proxies may bemade unless the shareholders have been furnished with the annual report. Most publiccompanies include the annual report in the mailing with their proxy statement orinclude the annual report with the proxy materials in accordance with the e-proxyrequirements. Many companies satisfy their annual report disclosure requirements bywrapping a glossy cover over their printed Form 10-K, together with a “Letter toShareholders” from the Chief Executive Officer.

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BROKER VOTING

The vast majority of shareholders hold their shares indirectly through banks,brokers and other intermediaries. This type of ownership is commonly called holdingshares in “street name.” For shares held in street name, the proxy materials are sent tothe intermediaries who forward them on to the beneficial holders with a request forvoting instructions.

Most brokers and other intermediaries are subject to Rule 452 of the New YorkStock Exchange (NYSE) as members of the exchange, which rule permits them to voteshares for which they have not received voting instructions only on what are referredto as “routine” matters. Member organizations of The NASDAQ Stock Market LLC(NASDAQ) are subject to NASDAQ Rule 2251, which generally prohibits voting onuninstructed shares but permits brokers and intermediaries to follow the rules ofanother stock exchange. As a result, NYSE Rule 452 has historically governed votingon uninstructed shares by brokers and other intermediaries regardless of whether theissuer was a NASDAQ or NYSE listed company. Under Rule 452, if the beneficialholders do not provide voting instructions to the intermediaries, the intermediaries willnot be permitted to vote those shares on non-routine matters. Historically, “routine”matters included the election of directors (if uncontested), ratification of the auditors,and most other matters not involving fundamental corporate transactions or theapproval of equity incentive plans or amendments to such plans. Effective July 1,2009, however, uncontested director elections are no longer treated as routine mattersand intermediaries are not permitted to vote in any director elections withoutinstructions from the street holder.

In addition, Section 957 of the Dodd-Frank Act requires the rules of the nationalsecurities exchanges to prohibit their member organizations (that is, brokers and otherintermediaries) from voting or granting a proxy to vote the shares held by their clientson matters regarding director elections or executive compensation or on any other“significant matter,” as determined by the SEC, without the instructions of suchholders. Under prior rules, votes on executive compensation not involving an equityincentive plan, including votes on say-on-pay, were treated as routine matters in whichthe intermediaries could vote without instructions. In response to the new requirementof the Dodd-Frank Act, the NYSE filed a proposed rule change to Rule 452 andcorresponding NYSE Listed Company Manual Section 402.08 on August 26, 2010, toprohibit broker discretionary voting on all executive compensation matters, includingthe say-on-pay, frequency of say-on-pay and golden parachute votes. The SEC

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approved the rule change on an accelerated basis on September 9, 2010. Likewise,NASDAQ filed a proposed rule change on September 14, 2010, which amendedNASDAQ Rule 2251 to prohibit its member organizations from voting shares withoutinstructions from the beneficial owners in matters regarding the election of directors orexecutive compensation or any other “significant matter,” as determined by the SEC.The SEC approved the rule change on an accelerated basis on September 24, 2010.

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REGULATION OF ANALYST COMMUNICATIONS AND OTHERVOLUNTARY DISCLOSURES

While public companies are subject to numerous laws, rules, regulations andlisting requirements that mandate the disclosure of information in registrationstatements, periodic reports and various other filings, public companies often sharenews, projections and other information with the market on a voluntary basis as part oftheir investor and public relations strategies. Prior to 2000, voluntary public companydisclosure was not heavily regulated by the SEC. However, with the adoption ofRegulation FD in October 2000 and Regulation G and related rules in March 2003, theSEC established rules that affect the scope, timing and content of voluntary disclosureby U.S. public companies.

Regulation FD (FD stands for fair disclosure) was implemented to addressperceived abuses involving the selective disclosure of material nonpublic informationto analysts, institutional stockholders and others with the opportunity to profit fromsuch information. Numerous public companies were disclosing earnings results andother nonpublic information to analysts and institutional investors before broadlydisseminating that information to the general public. The SEC believed thisinformational disparity undermined the investing public’s confidence in the fairnessand integrity of securities markets, since those who were privy to such information hadthe opportunity to profit at the expense of the uninformed. With the adoption ofRegulation FD, the SEC now requires any issuer that discloses material nonpublicinformation to securities market professionals, stockholders and others who mightreasonably be expected to trade on that information to publicly disclose suchinformation on a simultaneous or prompt basis, depending on the circumstances.

With the adoption of Regulation G and related rules, the SEC sought to establishuniformity in the type of financial information that is presented to investors in anissuer’s public filings and in earnings reports and other voluntary disclosures.Regulation G was implemented pursuant to Section 401(b) of SOX (for furtherdiscussion, see the section of this handbook entitled “The Sarbanes-Oxley Act”),which directed the SEC to address public companies’ use of “pro forma” financialinformation and other financial measures that were not prepared and presented inaccordance with generally accepted accounting principals, or GAAP. Subject to certainexceptions that are discussed below, Regulation G requires any public companydisclosure that includes a non-GAAP financial measure to:

• include the most directly comparable GAAP measure; and

• provide a reconciliation between the non-GAAP measure and the mostdirectly comparable GAAP measure.

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REGULATION OF ANALYST COMMUNICATIONSAND OTHER VOLUNTARY DISCLOSURES

When Regulation G was adopted, the SEC simultaneously made changes toItem 10 of Regulation S-K and the Form 8-K filing requirements to addressnon-GAAP financial measures included in SEC filings as well as earnings and otherfinancial information that is disclosed outside of required SEC filings.

THE PRE-REGULATION FD FRAMEWORK

Prior to the Supreme Court’s decisions in Chiarella v. United States (445 U.S.222 (1980)) and Dirks v. SEC (463 U.S. 646 (1983)), the SEC relied on principles offraud, particularly the law of insider trading, to deter trading conducted while inpossession of material nonpublic information. Early case law developed a “parity ofinformation” standard, which required that all traders have equal access to corporateinformation. These early decisions also provided the foundation for the “disclose orabstain” rule: a corporate insider must disclose all material nonpublic informationknown to him before trading, or if such disclosure is not possible, must abstain fromtrading.

In Chiarella, the Supreme Court refused to expand the scope of the disclose orabstain rule beyond corporate insiders to include third parties who are in possession ofmaterial nonpublic information. The Court rejected the “parity of information”standard where trading could be deemed fraudulent whenever one trader possessedmaterial information not generally available to the public. The Court instead held thatthe law imposed no duty to disclose information or abstain from trading absent afiduciary or other relationship of trust and confidence between the trading parties.

In Dirks, the Supreme Court considered whether a “tippee” who received materialnonpublic information from a corporate insider was liable for trading on the basis ofthat information. The Court held that a recipient of inside information is onlyprohibited from trading when the recipient knows (or should have known) that theinformation received from an insider had been made available improperly and inbreach of the insider’s fiduciary duty to shareholders. The Court suggested that such abreach could be found when the insider stood to receive a pecuniary or reputationalbenefit as a result of the disclosure. The decision in Dirks reflected the Court’s beliefthat analysts play an important role in uncovering and disseminating information toinvestors and was thought to offer significant protection to insiders who makeselective disclosures to analysts, as well as to the analysts and their clients who receivesuch information.

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After Dirks, the SEC’s approach to eliminating the informational disparitiescreated by selective disclosure shifted from treating such disclosure as a type offraudulent conduct to requiring full and fair disclosure of material information byissuers. With the adoption of Regulation FD, the SEC sought to create a more levelplaying field for smaller investors by ensuring that all investors are provided withtimely access to any material information that an issuer chooses to disclose.

REGULATION FD

In August 2000, the SEC adopted Regulation FD, which prohibits the selectivedisclosure of material nonpublic information to securities market participants when itis reasonably foreseeable that those participants will trade on the basis of thatinformation. Regulation FD requires an issuer to publicly disseminate information thatit has selectively disclosed to market professionals and security holders, with thetiming of such dissemination dependent on whether the selective disclosure was“intentional” or “non-intentional.” Every U.S. issuer that is subject to the ExchangeAct’s reporting requirements must comply with Regulation FD. “Foreign privateissuers” are not required to comply with Regulation FD, although they remain subjectto liability for conduct that violates the antifraud provisions of the federal securitieslaws, including Rule 10b-5 under the Exchange Act. Foreign private issuers arediscussed further in the section of this handbook entitled “Foreign Private IssuerReporting and Compliance.”

Practice Tip: Many foreign private issuers have chosen to voluntarily comply withRegulation FD to reduce the risk that their selective disclosure to analysts and othermarket participants will result in insider trading liability under Rule 10b-5.

What Disclosure is Covered by Regulation FD?

Regulation FD only covers disclosure made by “senior officials” of the issuer,which is defined to include any director or executive officer, investor relations orpublic relations officer, or any other officer, employee or agent of the issuer whoregularly communicates with market professionals, stockholders and other personscovered by the regulation. Generally, an issuer would not be liable for the selectivedisclosure of material nonpublic information by an employee who is not a seniorofficial, so long as that employee was not directed to make the disclosure by a seniorofficial.

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Regulation FD does not cover every disclosure by a senior official, but onlydisclosure to the following persons:

• brokers-dealers, investment advisers and certain institutional investmentmanagers, and in each case, their associated persons;

• investment companies, hedge funds and their affiliated persons; and

• any of the issuer’s stockholders, if it is reasonably foreseeable that they willtrade on the basis of the information disclosed.

Communications Excluded from Regulation FD

Regulation FD excludes from its coverage any disclosure of material nonpublicinformation by a senior official that is made:

• to a person who owes theissuer a duty of trust or con-fidence, such as an attorney,investment banker, oraccountant;

• to any person who expresslyagrees to maintain theinformation in confidence;and

• in connection with most offer-ings of securities registeredunder the Securities Act.

Practice Tip: Pursuant to Section 939Bof the Dodd-Frank Act, the SECremoved the exemption in RegulationFD for disclosures made to credit rat-ings agencies. As a result, companiesthat disclose material nonpublicinformation to credit ratings agencieswill need to review their agreementswith such entities in order to assure thatthere is an appropriate confidentialityundertaking.

Practice Tip: Many issuers rely on the use of confidentiality agreements as ameans of selectively disclosing material nonpublic information without violatingRegulation FD, particularly in the context of private placements. Regulation FDdoes not require that such an agreement be in writing; rather, an express oralagreement will suffice. Although not required, it is recommended that anyconfidentiality agreement include an acknowledgement that a recipient of materialnonpublic information is prohibited from trading on the basis of that information.

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Timing of Public Disclosure

The timing of any public disclosure an issuer is required to make pursuant toRegulation FD depends on whether the selective disclosure was intentional ornon-intentional.

• Intentional Disclosure. Disclosure will be considered intentional if theperson making it knows, or is reckless in not knowing, that the selectivelydisclosed information is both material and nonpublic. If selective disclosureis deemed to be intentional, the issuer must make simultaneous publicdisclosure of such information. To ensure compliance with this requirement,issuers will often publicly disseminate any material nonpublic informationbefore disclosing it to a more limited audience. Note that a disclosure neednot be planned to be deemed intentional. For instance, if a company’s CEOis in a nonpublic meeting with analysts and provides information the CEOknew (or should have known) was material and nonpublic in response to aspontaneous question on a subject which was not on the agenda, the CEO’sdisclosure would be “intentional” and in violation of Regulation FD, eventhough the disclosure was not planned.

• Non-Intentional Disclosure. If a senior official discovers that there has beena non-intentional disclosure of information that such official knows, or isreckless in not knowing, is both material and nonpublic, that informationmust be publicly disseminated promptly, which means as soon as reasonablypracticable after such discovery, but in no event after the later of: (i) 24hours; or (ii) the commencement of the next day’s trading on the NYSE.

Satisfying the Public Disclosure Requirement

Issuers have considerable flexibility in determining how to satisfy the publicdisclosure requirements of Regulation FD. The public disclosure requirement can besatisfied by filing the information in a Form 8-K or by any other non-exclusionarymethod of disclosure that is reasonably designed to provide broad public access to theinformation. Issuers who choose not to file a Form 8-K can rely on traditional methodsof public dissemination – such as issuing a press release to a wire or news service – oron more current technologies, such as a conference call that is accessible to the publicby phone or webcast.

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Practice Tip: If an issuer intends to make public disclosure by means of aconference call or webcast, the SEC requires that the public be given notice areasonable period of time in advance. The SEC has also suggested that the webcastor call be made available for some reasonable period of time afterwards, and as aresult, many issuers will post a replay or transcript in the investor relations sectionof their websites. See “Practice Tip: Conducting a Reg FD/Reg G CompliantEarnings Call” below.

Is a Website Posting Public Disclosure? At the time Regulation FD was adopted,the SEC recognized the potential for using website disclosure as an acceptable meansof satisfying the “public disclosure” requirement of Regulation FD, but stopped shortof concluding that such disclosure would, by itself, suffice. In August 2008, the SECissued an Interpretative Release – Commission Guidance on the Use of CompanyWebsites (SEC Release No. 34-58288) – in which it concluded that certain issuerscould satisfy the public disclosure requirement under Regulation FD by postinginformation to their websites, provided those issuers were able to conclude – usingfactors outlined in the release – that their website is a recognized channel ofdistribution and that any information posted and accessible on the website has been“disseminated” for purpose of the regulation. While the release did not provide“bright-line” guidance as to when the public disclosure requirements of RegulationFD could be satisfied by an issuer’s website posting, it did provide a non-exclusivelist of considerations that an issuer could use to make such a determination.

What is Material Information?

Regulation FD only prohibits the selective disclosure of material information.Regulation FD does not define materiality, but instead relies on the definition that hasbeen developed through case law. Based on the general principles established by thecourts, information would be considered material if:

• there is a substantial likelihood that a reasonable investor would consider itimportant in making an investment decision;

• it would be viewed by a reasonable investor as significantly altering the totalmix of information available; or

• it is reasonably certain to have a substantial effect on the market price of theissuer’s securities.

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Given the fact-dependent nature of the analysis, there is no bright-line rule as towhat should be considered material for purposes of Regulation FD. In the adoptingrelease for Regulation FD, however, the SEC provided a non-exclusive list of the typesof information and events that issuers should carefully review to assess materiality:

• earnings information;

• mergers, acquisitions, tender offers, joint ventures, or changes in assets;

• new products or discoveries, or developments regarding customers orsuppliers (e.g., the acquisition or loss of a contract);

• changes in control or in management;

• change in auditors or auditor notification that the issuer may no longer relyon an auditor’s audit report;

• events regarding the issuer’s securities — e.g., defaults on senior securities,calls of securities for redemption, repurchase plans, stock splits or changesin dividends, changes to the rights of security holders, public or private salesof additional securities; and

• bankruptcies or receiverships.

Practice Tip: The SEC has made clear that any communication between an issuerand analysts regarding earnings involves a high degree of risk under RegulationFD. As a result, any information that an issuer plans to disclose to an analystshould be carefully scrutinized to confirm that it is not material or has already beenpublicly disseminated. If those determinations cannot be made with certainty, theissuer should consider the information material and comply with the publicdisclosure requirements of Regulation FD.

The Consequences of Violating Regulation FD

Only the SEC can bring an action for a violation of Regulation FD. Upondetermining that material nonpublic information has been selectively disclosed inviolation of Regulation FD, the SEC can bring an administrative action seeking acease-and-desist order, or a civil action seeking an injunction and/or monetarypenalties against both the issuer and its executives. A violation of Regulation FD doesnot give rise to a private right of action or by itself represent a violation of the general

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antifraud provisions of Rule 10b-5 under the Exchange Act, although it is important tobe aware that selective disclosure could in certain circumstances result in a violation ofRule 10b-5.

Since the adoption of Regulation FD, the SEC has brought a handful ofenforcement actions against issuers and executives who were alleged to have beenresponsible for selective disclosure in violation of Regulation FD. One investigationand three enforcement actions were commenced by the SEC in 2002, and oneenforcement action has been brought each year since, with two actions brought in2010. Each enforcement action involved an issuer that had experienced a measurablespike in the trading volume and price of its stock that had not been preceded bypublicly announced news. For the most part, the Regulation FD enforcement actionsbrought to date have resulted in the submission of an offer of settlement by the issuersand/or executives who were the subject of the action. While none of these settlementsincluded an admission or denial of the SEC’s findings, the fact patterns described ineach action provide guidance as to the focus of the SEC’s enforcement efforts. Thetypes of conduct described in these actions included:

• nonpublic communications with analysts to quantify or expand upon theissuer’s prior public disclosures;

• disclosure of an issuer’s outlook during a nonpublic investor conference thatcontradicted the outlook presented during a public earnings call;

• the mistaken belief by an issuer’s spokesperson that information posted tothe issuer’s website had been publicly disseminated and that the subsequentselective disclosure of that information was permitted;

• an issuer’s selective reaffirmation of earnings guidance, which was contraryto its stated policy of publicly announcing all earnings updates; and

• selective disclosure during a nonpublic investor meeting that wascommunicated through a combination of statements, tone, emphasis anddemeanor.

Public and Nonpublic Statements

In October 2010, the SEC settled its most recent enforcement action againstOffice Depot, Inc., CEO Stephen Odland and former CFO Patricia McKay overalleged indirect guidance the two officers gave to analysts in a series of one-on-one

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calls. According to the SEC complaint, the company did not directly tell the analyststhat it would not meet their expectations but “signaled” that message through itsreferences to recent public statements of comparable companies about the impact ofthe slowing economy on their earnings. As a result of the calls, fifteen of the eighteenanalysts lowered their estimates, bringing the consensus second quarter 2007 estimatedown from $0.48 to $0.45 and the shares of Office Depot dropped 7.7% in thefollowing week. To settle the complaint, Odland and McKay each agreed to pay a$50,000 penalty and also agreed without admitting or denying wrongdoing to ceaseand desist from future violations. The action highlighted the SEC’s decision to focuson high ranking company officials who have instructed subordinates to engage inconduct that violated Regulation FD and also specifically singled out Office Depot fornot having written Regulation FD policies or procedures in place at the time.

The settlement with Office Depot followed an earlier SEC action in March 2010against Presstek, Inc. and its former CEO Edward J. Marino. The SEC alleged thatMarino disclosed negative material nonpublic information regarding Presstek’sfinancial performance to the managing partner of an investment managementcompany. As a result of the disclosure, the managing partner decided to sell all of theshares of Presstek held by the investment funds he advised. The SEC agreed to asettlement with Presstek for a $400,000 civil penalty. The Presstek action, togetherwith the Office Depot case, suggests that the SEC is continuing to focus on RegulationFD compliance.

As a comparison to the above actions, in a previous case in August 2005, theUnited States District Court for the Southern District of New York dismissed complaintsfiled by the SEC against Siebel Systems, Inc. and two of its executives allegingviolations of Regulation FD and the SEC’s cease-and-desist order issued in connectionwith a 2002 enforcement action. In its complaints, the SEC cited various publicstatements made by Seibel’s CFO that described Seibel’s generally poor performance,which he attributed to the overall performance of the economy. Later, at two privateevents attended by institutional investors, the CFO stated that things were better anddeals were in the pipeline. The SEC claimed the CFO violated Regulation FD by making“significantly more positive and upbeat” comments at these private meetings, and byfailing to link Seibel’s business results to the performance of the economy, as he haddone in his public statements. The SEC argued that the CFO’s public and nonpubliccomments were materially different, which represented a violation of Regulation FDwhen his comments from the private meetings were not publicly disseminated.

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In reaching its decision to dismiss the SEC’s complaints, the District Courtdisagreed with the heightened level of scrutiny used by the SEC to analyze the CFO’sstatements at the private events, finding that such scrutiny placed an unreasonableburden on corporate officials to become linguistic experts. The court believed that theSEC’s excessive scrutiny of vague general comments could have a chilling effect onpublic disclosure, as companies would fear that even the slightest variance in theirpublic and private statements would represent a violation of Regulation FD. The courtbelieved that the SEC’s aggressive enforcement posture provided companies with noclear guidance as to how to conform their conduct to comply with Regulation FD andwas not supported by the language of the rule.

While the District Court’s decision in Seibel can be viewed as a clear rebuke ofthe SEC’s overly aggressive enforcement efforts, it also illustrated the significant risksinherent in nonpublic discussions with securities market participants and reinforced thebenefit of providing senior officials with a script for any such occasion, which mayhelp eliminate inadvertent deviations between public and nonpublic statements.

The Importance of Compliance Programs

In September 2009, the SEC settled a Regulation FD enforcement action, whichwas brought against Christopher Black, the former CFO of American CommercialLines, or ACL. The action was significant in that it represented the first time the SECdid not include the issuer in an enforcement action for a violation of Regulation FD.The SEC alleged that Mr. Black, who also acted as ACL’s investment relations officer,had violated Regulation FD by sending an e-mail to analysts that contained nonpublicearnings information. Although the CEO had instructed Mr. Black to ask ACL’soutside counsel to review the email, Mr. Black failed to do so. In its complaint, theSEC identified the key factors that it considered when deciding to exclude ACL as aparty to the action, including that ACL:

• had fostered a culture of compliance, including the implementation ofRegulation FD controls and procedures and training sessions with counsel;

• ensured the prompt public dissemination of the selectively disclosedinformation in a Form 8-K filing;

• promptly reported the violation to the SEC and fully cooperated in the SEC’sinvestigation; and

• reviewed its procedures after the violation occurred and revised them asnecessary to prevent a similar violation in the future.

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While the enforcement action against Mr. Black shows that even a robustcompliance program cannot always prevent a violation of Regulation FD, itdemonstrates that an effective compliance program may persuade the SEC to notpursue an enforcement action against the company even where one of its officers hasviolated Regulation FD.

Practice Tips: Following are some of the lessons that can be learned from theSEC’s enforcement actions to date:

• Senior officials must exercise extreme caution during any nonpublic meetingwith market professionals and investors and should understand that evenreaffirmations, non-specific responses or clarifications to prior guidance mayconstitute a violation of Regulation FD.

• At each meeting between an issuer and market participants, one person shouldbe given responsibility for ensuring that senior officials remain withinscripted boundaries and redirecting the discussion when off-agenda topics areraised.

• Senior officials should understand that their tone or demeanor should notconvey information that they would be prohibited from relaying verbally. Inshort, be careful not just of what you say, but how you say it!

• The SEC often looks to changes in stock price and trading volume whenassessing the materiality of a disclosure. If the market reacts to disclosure thathad been considered immaterial, the company should reevaluate its con-clusion and consider making prompt public disclosure.

• A robust compliance program, together with prompt public disclosure andproactive corrective measures following a violation, may help insulate acompany from liability for a senior official’s non-compliant acts.

REGULATION G AND RELATED RULES

The SEC adopted rules that became effective in March 2003 that regulate thepublic disclosure by public companies and their representatives of financial measuresthat are not calculated and presented in accordance with GAAP. These rules werepromulgated pursuant to Section 401(b) of SOX to eliminate investor confusion that

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may result from the use by public companies of non-GAAP financial measures. Therules consisted of:

• a new Regulation G, which governs public disclosure of non-GAAPfinancial measures, principally in a company’s earnings release;

• amendments to Item 10 of Regulation S-K, which governs the inclusion ofnon-GAAP financial measures in registration statements, periodic reportsand certain other filings made with the SEC; and

• amendments to the Form 8-K reporting requirements, which require issuersto furnish in a Form 8-K any material nonpublic information regarding theissuer’s results of operations or financial condition that the issuer hasdisclosed or released.

Regulation G was adopted in order to ensure the uniformity and comparability offinancial information provided by public companies. Generally, whenever a publiccompany discloses or releases material information that includes a non-GAAP financialmeasure (other than certain disclosures relating to a proposed business combination), thecompany is required to comply with Regulation G. Regulation G includes:

• a general anti-fraud provision which prohibits the use of a non-GAAPfinancial measure in a manner which, taken together with any accompanyingdisclosure, is untrue or misleading; and

• a requirement that, upon a public company’s disclosure of a non-GAAPfinancial measure, the company must also disclose the most directlycomparable GAAP financial measure and a quantitative reconciliation of thedifferences between the non-GAAP financial measure and the most directlycomparable GAAP financial measure.

Practice Tip: As part of its review of periodic reports on Forms 10-K and 10-Q,the SEC Staff will review company earnings releases and investor presentations todetermine whether companies are omitting material information from their SECfilings, and may issue comments where material information is disclosed in suchpresentations and not included in a company’s SEC filings, including thecompany’s MD&A.

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What are Non-GAAP Financial Measures?

A non-GAAP financial measure is a numerical measure of a company’s historicalor future financial performance, financial position or cash flow that excludes (orincludes) amounts that are included (or excluded) in the comparable GAAP measure.Non-GAAP financial measures do not include operating and other statistical data (suchas same store sales) or ratios calculated using GAAP financial measures.

What Types of Disclosures Does Regulation G Cover?

Regulation G covers any public communication of material information thatcontains a non-GAAP financial measure, whether written, oral, communicated in awebcast or other broadcast or furnished voluntarily in a press release or as part of arequired filing with the SEC. If non-GAAP information is communicated orally – e.g.,as part of a presentation given during an earnings call or webcast – Regulation G doesnot require oral disclosure of the directly comparable GAAP measure and the requiredreconciliation, provided that:

• such information is provided on the issuer’s website at the same time thatthe presentation is being given; and

• the website address where such information can be found is included inthe presentation.

Practice Tip: If a non-GAAP financial measure is included in slides or othermaterials that are distributed in hard copy or made available electronically toparticipants in a conference call or webcast, the comparable GAAP measure andreconciliation required by Regulation G must also be included in that material.

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Non-GAAP Measures in SEC Filings

In addition to the requirements of Regulation G, Item 10 of Regulation S-Kimposes additional restrictions and disclosure requirements whenever non-GAAPfinancial measures are included in filings with the SEC. The additional disclosures are:

• the most directly comparable GAAP measure must be presented in the filingwith equal or greater prominence;

• the filing must include a statement disclosing the reasons why managementbelieves that presentation of the non-GAAP financial measure providesuseful information to investors concerning the company’s financial conditionor results of operations; and

• the filing must include, to the extent material, a statement disclosing theadditional purposes, if any, for which the company’s management uses thenon-GAAP financial measure.

Item 10 prohibits:

• excluding charges or liabilities that required, or will require, cash settlementfrom non-GAAP liquidity measures, other than the measures EarningsBefore Interest and Taxes (EBIT) and Earnings Before Interest, Taxes,Depreciation and Amortization (EBITDA);

• adjusting a non-GAAP financial performance measure to eliminate orsmooth items identified as non-recurring, infrequent or unusual, when (1) thenature of the charge or gain is such that it is reasonably likely to recur withintwo years, or (2) there was a similar charge or gain within the prior twoyears;

• presenting non-GAAP financial measures on the face of the company’sGAAP financial statements or in the accompanying notes;

• presenting non-GAAP financial measures on the face of any pro formafinancial information required to be disclosed by Article 11 ofRegulation S-X; and

• using titles or descriptions of non-GAAP financial measures that are thesame as, or confusingly similar to, titles or descriptions used for GAAPfinancial measures.

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Practice Tip: In January 2010, the Staff updated its C&DI’s on Non-GAAP financialmeasures to facilitate the inclusion of non-GAAP financial measures in SEC filings. InQuestion 102.03, the Staff relaxed the requirements for presenting non-GAAPmeasures that exclude recurring items. Previously, the Staff generally required that acompany demonstrate the usefulness of disclosing a non-GAAP measure that excludedrecurring charges. In the updated C&DI, the Staff modified its position to permit thedisclosure of such non-GAAP measures provided that the company otherwise complieswith Regulation G and Item 10(e). In Question 102.04, the Staff clarified thatItem 10(e)(i)(D) of Regulation S-K only requires that a company disclose howmanagement uses a non-GAAP measure to the extent that it is material, and that thecompany does not need to use the non-GAAP measure in its business in order to beallowed to disclose it. In Questions 102.09 and 103.01, the Staff stated that companiesmay disclose adjusted EBIT and adjusted EBITDA measures in a company’s MD&Awhere necessary to disclose a material term of a credit facility. Otherwise, theexception in Item 10(e) allowing disclosure of EBIT and EBITDA as non-GAAPliquidity measures does not apply to adjusted EBIT and adjusted EBITDA measures.However, the prohibition in Item 10(e) would not prohibit the disclosure of adjustedEBIT or adjusted EBITDA as a performance measure.

The Consequences of Violating Regulation G

Similar to Regulation FD, only the SEC can bring an action for a violation ofRegulation G. The SEC can bring an administrative action seeking a cease-and-desistorder, or a civil action seeking an injunction and/or monetary penalties. Regulation Gexpressly provides that a person’s failure to comply with its requirements does not byitself affect such person’s liability under Rule 10b-5, although the SEC has expressedits view that some disclosures of non-GAAP financial measures could give rise to aviolation of Rule 10b-5 if all the elements for such a violation are present.

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Amendments to Form 8-K

When Regulation G was adopted in 2003, the SEC also amended the Form 8-Kfiling requirements to include a new Item 2.02 (previously, Item 12), “Disclosure ofResults of Operations and Financial Condition.” Item 2.02 requires any public companythat publicly discloses or releases material nonpublic information regarding a company’sresults of operations or financial condition for an annual or quarterly fiscal period tofurnish such information in a Form 8-K that is filed with the SEC within four businessdays of such disclosure or release. While a new Item 2.02 Form 8-K would ordinarilyneed to be filed each time such earnings and financial information is disclosed, the SECprovided a limited exception for material nonpublic earnings and financial informationthat is disclosed orally, telephonically, by webcast, by broadcast, or by similar means ina presentation that is complementary to, and occurs within 48 hours after, a relatedwritten release or announcement that is the subject of an Item 2.02 Form 8-K. See“Practice Tip: Conducting a Reg FD/Reg G Compliant Earnings Call” below.

Any earnings information that is included in a Form 8-K pursuant to Item 2.02 isdeemed to be “furnished” and not “filed” with the SEC, which means such informationis not subject to Section 18 of the Exchange Act or incorporated by reference into theissuer’s registration statements. As a result, not all of the restrictions and disclosurerequirements imposed by Item 10 of Regulation S-K would apply where non-GAAPfinancial measures are used in an earnings release furnished under Item 2.02 ofForm 8-K. Instead, the Item 2.02 Form 8-K must only include, in addition to thedisclosure required by Regulation G:

• the reasons why management believes that the non-GAAP financialmeasures are useful to investors; and

• the additional purposes, if any, for which management uses the non-GAAPfinancial measures.

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Practice Tip: Conducting a Reg FD/Reg G Compliant Earnings Call

The following outlines the procedures that should be followed by a publiccompany that intends to conduct an analyst/investor conference call to discuss anearnings release for a recently completed quarterly or annual fiscal period.

1. Notice. Provide notice a reasonable period of time in advance of the call. Forregular quarterly earnings calls, the SEC has stated that notice of several dayswould be reasonable. The notice, which can be delivered in a press release orForm 8-K or by using any other widely-disseminated method of delivery, mustinclude:

• the date, time, subject matter and means for listening to the call (e.g., thedial-in number or location of a webcast);

• if any financial, statistical or Regulation G information is required to be postedto the company’s website in connection with the call (see Item 4 below), theaddress for that website and the location where the information can be found(e.g., in the investor relations section of the website); and

• whether, and for how long, the public can access a replay or transcript of thecall on the company’s website (see Item 6 below).

2. Notify Stock Exchanges. Both NYSE-listed and NASDAQ-listed companiesmust provide their exchange with advance notice before issuing an earningsrelease. At least ten minutes prior to issuing an earnings release:

• a NYSE-listed company must notify its NYSE representative by telephone andprovide the NYSE with the text of the earnings release by e-mail; and

• a NASDAQ-listed company must notify MarketWatch through its electronicdisclosure submission system.

3. File the Earnings Release with a Form 8-K. The earnings release should beincluded under Item 2.02 of a Form 8-K that is furnished to the SEC in advance ofthe earnings call. The timing is important: if the Form 8-K is furnished to the SECno more than 48 hours prior to the earnings call, there will be no need to furnishanother Item 2.02 Form 8-K with any earnings information that is discussed duringthe call (assuming proper advance notice of the call has been given, as describedabove).

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4. Post Financial, Statistical and Regulation G Information to Website. Anyfinancial and statistical information that will be used during the earnings call shouldbe posted to the company’s website prior to the call. If any non-GAAP financialmeasures will be used during the call, the disclosure required under Regulation Gshould also be posted to the website. The SEC encourages, but does not require, thatsuch information remain available on a company’s website for a minimum of 12months.

5. Conduct Earnings Call. The company should conduct its earnings call within48 hours after the Item 2.02 Form 8-K has been furnished to the SEC. Public accessto the call should be provided through a dial-in number, a webcast or similarmethod of broadcast. Members of the public that are provided with a dial-innumber can be given “listen-only” access and do not need to be provided with theability to ask questions. Prior to commencing the call, it is recommended that acompany spokesperson or senior official:

• disclose the location on the company’s website of any financial or statisticalinformation that will be used during the call, as well as any informationrequired by Regulation G; and

• recite and/or identify the location of the company’s disclaimer forforward-looking statements, to ensure that any forward-looking informationdiscussed during the call is afforded the protection of the safe harbor under thePrivate Securities Litigation Reform Act of 1995.

6. Post Replay or Transcript of Call to Website. Promptly after the earnings call,post an audio replay or transcript of the call to the company’s website. By doing so(and assuming the public was provided with proper advance notice of where andwhen the replay or transcript would be available), any material nonpublicinformation that is discussed during the call will be deemed to have been publiclydisseminated for purposes of Regulation FD.

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THE SARBANES-OXLEY ACT

The Sarbanes-Oxley Act of 2002 was adopted in response to a series of highlypublicized corporate accounting scandals. SOX ushered in sweeping reforms designedto strengthen the integrity of the financial markets by improving the accuracy andreliability of public disclosures required under the securities laws. These reformsincluded measures to:

• strengthen the role and independence of audit committees;

• increase management accountability for the quality and accuracy of publiccompanies’ financial reporting and other material public disclosures;

• reduce the potential for management conflicts of interest;

• improve the regulatory oversight and independence of public accountingfirms;

• increase protections for whistleblowers;

• enhance public companies’ financial disclosures and real-time reporting; and

• require attorneys, including attorneys practicing in-house, to report corporatewrongdoing.

Additional reforms introduced by SOX include scheduled SEC reviews ofperiodic public company disclosures, rules and regulations to address conflicts ofinterest arising from securities recommendations by research analysts, expandedcriminal penalties for violations of federal securities laws and an extended statute oflimitations for private rights of actions relating to securities fraud claims.

Many of the SOX reforms apply generally to all public companies. Others applyonly to listed companies, which for SOX purposes are those public companies thathave listed their securities on a U.S. stock exchange, such as the NYSE or NASDAQ.

It is important to note that SOX applies generally to U.S. and non-U.S. companiesalike. However, a number of the SEC rules and stock exchange listing standardsimplementing SOX provide exemptions or other limited compliance relief to non-U.S.companies that qualify as foreign private issuers. The application of SOX to foreignprivate issuers is discussed further in the section of this handbook entitled “ForeignPrivate Issuer Reporting and Compliance.”

The SOX reforms are reflected in its specific provisions as well as throughamendments to the Securities Act, the Exchange Act and other federal laws, SEC


rules, stock exchange listing rules and rules adopted by the Public CompanyAccounting Oversight Board (PCAOB), an independent self-regulatory agency createdby SOX to oversee public accounting firms. We discuss below the aspects of SOX thatmost directly affect public companies.

AUDIT COMMITTEE STANDARDS AND INDEPENDENCE

Listed Company Audit Committee Requirements

Section 301 of SOX required the SEC to issue rules directing U.S. stock exchangesto prohibit the listing of a company’s shares unless its audit committee meets certainstandards designed to ensure auditor independence and to preserve the integrity of theaudit process from improper influence by company management. As a result, the SECadopted Rule 10A-3 under the Exchange Act, which mandated that the exchanges adoptlisting standards that at a minimum incorporate the requirements of Section 301, whichare discussed below. In fact, the rules adopted by the stock exchanges vary somewhatfrom these threshold requirements. There are also variations among the rules adopted byindividual stock exchanges. We discuss the variations in the applicable rules of theNYSE and NASDAQ in the section of this handbook entitled “Stock Exchange ListingRequirements.”

Section 301 of SOX and Rule 10A-3 require stock exchanges to adopt thefollowing listing standards applicable to listed companies:

Responsibility for Auditor Oversight. The audit committee must be directlyresponsible for the appointment, compensation and oversight of the work of thecompany’s registered public accounting firm engaged to perform audit services, andthe auditors must report directly to the audit committee. Any disagreements betweenmanagement and the auditors regarding financial reporting are to be resolved by theaudit committee. This role of the audit committee does not supersede any requirementsunder law or a company’s governing documents for the company’s board orshareholders to recommend, or approve or ratify its auditors. Rather, it establishes thatthe audit committee’s selection is required in addition to any such requirement. Asdiscussed below under “Auditor Independence and Oversight – Permitted Non-AuditServices; Pre-Approval of Services,” the audit committee must pre-approve all auditand, subject to certain de minimis exceptions, non-audit services provided by thecompany’s auditors.

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Practice Tip: The prohibition onan audit committee memberreceiving any compensation otherthan in the member’s capacity as amember of the board of directorsor any board committee extends topayments received as an officer oremployee, as well as certain othercompensatory payments, whetherdirect or indirect. These wouldinclude payments to spouses andcertain close family members, aswell as payments to an entity inwhich the audit committeemember is an executive officer,director, general partner,managing member or similarposition and which providesconsulting, advisory or similarservices to the company or anysubsidiary.

Independence. Each audit committeemember must be “independent,” whichmeans, at a minimum, that he or she must not,other than as compensation for service on theboard of directors or any of its committees,accept any consulting, advisory or othercompensatory fees from the company, or bean “affiliated person” of the company or anyof its subsidiaries. The definition of“affiliated person” for these purposes isconsistent with the definition employedelsewhere in the federal securities laws, andmeans a person that directly, or indirectlythrough one or more intermediaries, controls,is controlled by, or is under common controlwith, the subject person. “Control” is alsodefined consistently with other definitions ofthat term in the federal securities laws tomean the power to direct or cause thedirection of the management and policies of aperson, whether through the ownership ofvoting securities, by contract or otherwise.

Whether a particular person is an “affiliated person” depends on a considerationof all relevant facts and circumstances. Because of the difficulty inherent in makingsuch a determination, the SEC expressly adopted a safe harbor exception from thedefinition of “affiliated person” for the purpose of testing the independence of auditcommittee members. Under the exception, a person is deemed not to control an issuerif the person is neither an executive officer nor a greater than 10% shareholder of theissuer. In contrast, executive officers, employee directors, general partners andmanaging members of affiliates are deemed to be affiliates of the company.

The SEC has authority to exempt particular relationships from the independencerequirements for audit committee members, and has exercised that authority to provideaccommodations for newly public companies and audit committee members who siton the board of both a parent company and its controlled subsidiary. Recognizing thedifficulty that private companies often have in recruiting outside directors prior to

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going public, SEC rules require only one independent audit committee member at thetime a company goes public, a majority of independent members within 90 daysthereafter and a fully independent audit committee within a year. In the case ofcompanies that operate through subsidiaries with overlapping boards of directors, theSEC reasoned that an audit committee member of a parent company who is otherwiseindependent should not lose that designation merely by serving on the board of acontrolled subsidiary. Accordingly, SEC rules exempt from the “affiliated person”prohibition those audit committee members who sit on the boards of both a parentcompany and its controlled subsidiary, provided that the member otherwise meets theindependence requirements for both the parent and subsidiary.

Foreign private issuers are accorded additional exemptions from theindependence requirements for audit committee members. For example, where aforeign private issuer’s home country laws require its board to contain anon-management employee representative, that person may sit on the audit committee,as may a non-management affiliated person with observer-only status. In addition, anon-management representative of a foreign government may sit on the foreign privateissuer’s audit committee provided the representative receives no compensation otherthan for service on the board and its committees. For foreign private issuers whoseboard of directors is divided into supervisory and management tiers, the SEC considersthe supervisory tier to be the board of directors for purposes of the independencerequirements. Foreign private issuers that have separate boards of auditors or statutoryauditors under their home country law are not subject to the SOX required auditcommittee listing standards and independence requirements if certain conditions aimedat approximating these standards and requirements are met, including, to the extentpermitted by law, application of the whistleblower, funding and authority to engageindependent advisers requirements described below.

SEC rules require listed companies to disclose in their annual report, and in anyproxy or information statement filed with the SEC for meetings at which directors areelected, whether their audit committee members are independent under the applicableSEC and stock exchange rules. If the listed company does not have an auditcommittee, its entire board of directors will be considered to be the audit committee,and it must disclose that the entire board is acting as the company’s audit committee.Non-listed companies with audit committees must also disclose whether their auditcommittee members are independent, but may choose the applicable definition ofindependence from any SEC-approved stock exchange. In addition, a company relying

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on any exemption from the SEC’s audit committee independence requirements mustdisclose that fact and state whether the company’s reliance on the exemption will havea material adverse effect on its audit committee’s ability to act independently andsatisfy the other requirements of Rule 10A-3.

Whistleblower Procedures. The audit committee must establish procedures toreceive and handle complaints regarding accounting, internal accounting controls, orauditing matters, and which enable employees to submit, confidentially andanonymously, concerns regarding questionable accounting or auditing matters.Employees who provide evidence of fraud or other corporate wrongdoing are referredto generally as “whistleblowers.”

Funding and Authority to Engage Advisers. The audit committee must have theauthority to engage independent counsel and other advisers, and the company mustprovide appropriate funding, as determined by the audit committee, to compensate thecompany’s auditors and any advisers the audit committee engages and to cover theaudit committee’s ordinary administrative expenses.

Audit Committee Financial Expert

Public companies are required to disclose in their annual report whether theiraudit committee has at least one member who qualifies as an “audit committeefinancial expert” as defined by SEC rules, and if not, why not. If the company’s auditcommittee has more than one audit committee financial expert, the company may butis not required to disclose the names of the additional experts.

To qualify as an audit committee financial expert, a person must possess thefollowing attributes:

• an understanding of GAAP and financial statements;

• the ability to assess the general application of such principles in connectionwith the accounting for estimates, accruals and reserves;

• experience preparing, auditing, analyzing, or evaluating financial statementsthat are generally comparable in breath and complexity of issues to those ofthe company, or experience actively supervising one or more personsengaged in those activities;

• an understanding of internal control over financial reporting; and

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• an understanding of audit committee functions.

In addition, the person must have developed those attributes through:

• education and experience as a principal financial officer, principalaccounting officer, controller, public accountant or auditor or throughexperience in a similar position;

• experience actively supervising a person in any of the positions describedabove;

• experience overseeing or assessing the performance of companies or publicaccountants with respect to the preparation, auditing or evaluation offinancial statements; or

• other relevant experience.

MANAGEMENT ACCOUNTABILITY FOR THE QUALITY AND ACCURACY OF

FINANCIAL REPORTING AND OTHER PUBLIC DISCLOSURES

Disclosure Controls and Procedures and Internal Controls over FinancialReporting

Management is responsible for designing, maintaining and evaluating acompany’s disclosure controls and procedures as well as its internal control overfinancial reporting, and must include certain SOX-mandated reports and certificationsrelating to these matters in the company’s periodic reports. The following discussionoutlines management’s responsibilities in this regard and the applicable SOXdisclosures and certifications.

Design, Maintenance and Evaluation of Disclosure Controls and Procedures andInternal Control over Financial Reporting. Under Rules 13a-15 and 15d-15 under theExchange Act, public companies are required to design and maintain disclosurecontrols and procedures and internal control over financial reporting. Disclosurecontrols and procedures are the controls and other procedures of a company designedto ensure that information the company is required to disclose in its Exchange Actreports is accurately accumulated and communicated to management in time to allowtimely decisions regarding required disclosure. In contrast, internal control overfinancial reporting is a process designed by or under the supervision of a company’sCEO and CFO, and effected by its board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in

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Practice Tip: Although there issubstantial overlap between acompany’s disclosure controls andprocedures and its internal control overfinancial reporting, each concept coversaspects that are not captured by theother. For example, a company’sdisclosure controls and procedures maynot cover dual signature requirementsimposed in order to safeguard assets,which would be included as an aspect ofinternal control over financial reporting.

accordance with GAAP, including assurance regarding the prevention or timelydetection of inaccurate or unauthorized transactions.

In addition, management isrequired to evaluate, with theparticipation of the CEO and CFO, theeffectiveness of the company’sdisclosure controls and procedures andinternal control over financial reporting.Evaluation of disclosure controls musttake place on a quarterly basis, andevaluation of internal controls must takeplace at the end of each fiscal year;however, management must disclosequarterly any change in the company’sinternal control over financial reportingthat occurred during the quarter that hasmaterially affected, or is reasonablylikely to materially affect, the company’s internal control over financial reporting. Forforeign private issuers, such evaluations must be made as of the end of each fiscalyear.

Management’s evaluation of the company’s internal control over financialreporting must be based on a suitable, recognized control framework established by agroup that has followed due-process procedures, including widespread distribution ofthe framework for public comment. To help companies strengthen their internalcontrols in a more cost-effective manner, the SEC has issued principles-basedinterpretive guidance11 to provide flexibility and encourage companies to focus onthose internal controls which will best identify and prevent risks which could result ina material financial misstatement. This guidance is organized around two broadprinciples. First is that management should evaluate whether its controls adequatelyaddress the risk that a material misstatement of the financial statements would not beprevented or detected in a timely manner. The second principle is that management’s

11 Commission Guidance Regarding Management’s Report on Internal Control Over FinancialReporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, Securities Act ReleaseNo. 8810, Exchange Act Release No. 55,929, 72 Fed. Reg. 35,324 (June 20, 2007), available athttp://www.sec.gov/rules/interp/2007/33-8810.pdf.

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evaluation of evidence about the operation of its controls should be based on itsassessment of risk, with more efficient approaches to gathering evidence beingemployed in low-risk areas and more extensive testing in high-risk areas. A companythat evaluates its internal controls in accordance with the interpretive guidance will bedeemed to have satisfied the SEC’s requirements for internal control evaluations.

Companies may also choose to base their evaluation on another recognizedcontrol framework, such as the Committee of Sponsoring Organizations of theTreadway Commission’s Internal Control – Integrated Framework. The chosenframework must be free from bias, permit reasonably consistent qualitative andquantitative measurements of a company’s internal control, be sufficiently complete sothat those relevant factors that would alter a conclusion about the effectiveness of acompany’s internal controls are not omitted, and be relevant to an evaluation ofinternal control over financial reporting. Regardless of the framework used, a companymust maintain evidence, including documentation, to provide reasonable support formanagement’s assessment of internal control over financial reporting.

Disclosure in Respect of Disclosure Controls and Procedures and Internal Controlover Financial Reporting. Section 404 of SOX directs the SEC to adopt rulesrequiring a public company’s annual report to include an internal control report thatstates management’s responsibility for establishing and maintaining adequate internalcontrol structure and procedures for financial reporting and assesses, as of the end ofthe most recent fiscal year, the effectiveness of such structure and procedures. Inaddition, if the company is an accelerated filer or a large accelerated filer, thecompany’s independent auditor is required to attest to and report on management’sassessment, subject to PCAOB Auditing Standard No. 5 (AS 5).

The SEC’s rules implementing Section 404 of SOX go further and require apublic company’s annual report to disclose:

• the conclusions of its CEO and CFO regarding the effectiveness of thecompany’s disclosure controls and procedures;

• a statement of management’s responsibility for establishing and maintainingadequate internal control over financial reporting;

• the framework management used to evaluate the effectiveness of thecompany’s internal control over financial reporting; and

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• management’s assessment of the effectiveness of the company’s internalcontrol over financial reporting as of the end of its most recent fiscal year,including whether or not internal control over financial reporting is effective.

In addition to the above, if the company is an accelerated filer or a largeaccelerated filer, its annual report must disclose that the company’s public accountingfirm has attested to and reported on management’s evaluation of the company’sinternal control over financial reporting, and the company must include the publicaccounting firm’s attestation report in the company’s annual report.

Recent Development: Section 989G of the Dodd-Frank Act added new Section404(c) to SOX, which exempts smaller reporting companies and non-acceleratedfilers from the requirement that the company include in its annual report anattestation report of its independent auditor on management’s evaluation of thecompany’s internal control over financial reporting.

Management’s assessment of the effectiveness of its internal control overfinancial reporting must disclose any “material weakness” in the company’s internalcontrol over financial reporting identified by management. Management is notpermitted to conclude that the company’s internal control over financial reporting iseffective if there are one or more material weaknesses in internal control over financialreporting. AS 5 identifies faults in internal controls in terms of a “deficiency,”“significant deficiency,” or “material weakness,” with the latter being the most severe.A “deficiency” exists when the design or operation of a control does not allowmanagement or employees to prevent or detect misstatements on a timely basis. A“significant deficiency” is a deficiency, or a combination of deficiencies, that is lesssevere than a material weakness yet important enough to merit attention. In contrast, a“material weakness” is defined in Rule 12b-2 under the Exchange Act as a“deficiency, or combination of deficiencies, in internal control over financialreporting, such that there is a reasonable possibility that a material misstatement of theregistrant’s annual or interim financial statements will not be prevented or detected ona timely basis.”

In addition to the required annual disclosures, a public company must disclose inits quarterly reports the conclusions of its CEO and CFO regarding the effectiveness ofthe company’s disclosure controls and procedures, and any change in the company’sinternal control over financial reporting that occurred during the quarter that has

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Practice Tip: If a company’sCEO or CFO changes, the personserving in the position at the timethe report is filed with the SEC isrequired to sign the applicablecertificate, even if he or she wasnot serving in the position duringthe period covered by the report.

materially affected, or is reasonably likely to materially affect, the company’s internalcontrol over financial reporting.

Section 302 Certification

Under Section 302 of SOX and related SEC rules, a public company’s CEO andCFO must make certain certifications in respect of the company’s disclosure controlsand procedures and internal controls over financial reporting in connection with thecompany’s annual and quarterly reports filed with the SEC. If a company has co-CEOsor co-CFOs, each of them must make the required certifications.

The CEO and CFO must certify that,based on their knowledge, the report is notmisleading and fairly presents the company’sfinancial condition, results of operations andcash flows for the period covered by thereport. The certifications must also cover theCEO’s and CFO’s responsibility for thedesign, maintenance and evaluation of thecompany’s disclosure controls and proceduresand internal control over financial reporting

and certain related disclosures. The SEC has adopted a specific form of theSection 302 certificate, a copy of which appears at the end of this section. The SECpermits only the following limited variations to the form: (i) the omission of the thirdparagraph (which certifies that the financial statements in the subject report fairlypresent the company’s financial condition, results of operations and cash flows) incircumstances where the accompanying report neither contains nor amends financialstatements; and (ii) revision of the references to “other certifying officer(s)” to use asingular “officer” to reflect that there is only one additional certifying officer.

The required certificates must be filed as exhibits to the applicable filings.Foreign private issuers must include the exhibits with their annual reports on Form20-F, but are not required to include them with their submissions on Form 6-K.

Section 906 Certification

Section 906 of SOX amended federal criminal law to require that each periodicreport containing financial statements filed by a company with the SEC contain acertification from the company’s CEO and CFO that the report fully complies with the

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requirements of the Exchange Act and the information contained in the report fairlypresents, in all material respects, the financial condition and results of operations ofthe company. The certification is considered “furnished” rather than “filed,” and thusdoes not subject the certifying CEO or CFO to liability under Section 18 of theExchange Act. Furthermore, unless specifically incorporated by reference, theSection 906 certification is not deemed incorporated by reference in any filing underthe Securities Act or Exchange Act. Nonetheless, violations of Section 906 carrypenalties of up to 10 years in prison and a $1 million fine for a knowing and recklessviolation, and up to 20 years in prison and a $5 million fine for a willful violation.

Prohibition Against Improper Influence on Company Audits

Under Section 303 of SOX and related SEC Rule 13b2-2 it is unlawful forofficers or directors of a public company and persons acting under their direction, todirectly or indirectly take any action to fraudulently influence, coerce, manipulate ormislead an auditor engaged in the performance of an audit when the person knew orshould have known that the action, if successful, could render the company’s financialstatements materially misleading. In contrast to Section 303, which prohibits a personfrom acting “for the purpose of” rendering a company’s financial statements materiallymisleading, the standard of liability under SEC Rule 13b2-2 is negligence; no specificintent or resulting misleading financial statements need be shown. Conduct that theSEC suggests may violate Rule 13b2-2 includes, among others:

• threatening to cancel or canceling existing non-audit or audit engagements ifthe auditor objects to the company’s accounting; and

• seeking to have a partner removed from the audit engagement because thepartner objects to the company’s accounting.

The SEC interprets the term “direction” to encompass a broader category ofbehavior than “supervision.” Accordingly, persons who are not under the supervisionof an officer or director but who act under their direction may be found liable forimproperly influencing the audit process and the preparation of the company’sfinancial statements. Such persons may include customers, vendors, creditors,accountants, securities professionals, attorneys and other advisers who, at the directionof an officer or director, provide false or misleading information which enables thecompany to mislead its auditor.

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Forfeiture of Certain Bonuses and Profits Following AccountingRestatements

Under Section 304 of SOX, if a company is required to restate its financialstatements due to material noncompliance, as a result of misconduct, with anyfinancial reporting requirement under the securities laws, the company’s CEO andCFO must reimburse the company for any bonus or other incentive or equity-basedcompensation received from the company during the 12-month period following thepublication or SEC filing (whichever is first) of the financial document being restated,and any profits realized from the sale of the company’s securities during that period.Section 304 is essentially a strict liability provision, requiring a CEO or CFO toreimburse the company for any such compensation regardless of whether or not theperson knew of or engaged in the misconduct which led to the restatement.Section 304 provides no private right of action, as the SEC has the exclusive right toenforce its provisions.12 It is important to note that Section 304 operates independentlyof the broader incentive compensation clawback provisions established by Section 954of the Dodd-Frank Act, which are discussed in greater detail in the section of thishandbook entitled “The Dodd-Frank Wall Street Reform and Consumer Protection Act– Incentive Compensation Clawback Policy.”

12 In re Digimore Corp. Derivative Litig., F.3d 1223, 1238 (9th Cir. 2008); Neer v. Pelino, 389 F. Supp.2d 648, 657 (E.D. Pa. 2005).

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Practice Tip: The SEC has taken an aggressive approach to enforcing the clawbackprovisions of Section 304. In July 2009, the SEC brought an enforcement actionagainst the retired CEO of CSK Auto Corporation, Maynard L. Jenkins, to recoverfor CSK and its shareholders more than $4 million in bonuses and profits thatJenkins realized from the sale of CSK stock while the company was filing fraudulentfinancial statements. Notably, the SEC did not allege that Jenkins engaged in anyfraudulent conduct, but that he “was captain of the ship and profited during the timethat CSK was misleading investors about the company’s financial health.”13 Jenkinsmoved to dismiss the SEC’s complaint, arguing that the clawback provisions ofSection 304 could not be applied to him absent his personal involvement in themisconduct that led to the restatement. On June 9, 2010, the court denied Jenkins’motion to dismiss, holding that Section 304 requires only misconduct on the part ofthe company, not specific misconduct by the company’s CEO or CFO.14

Code of Ethics Disclosure. Under Section 406 of SOX and related SEC rules,public companies must disclose in their periodic reports whether they have adopted acode of ethics for their principal executive, financial or accounting officers orcontroller (or persons performing similar functions), and if not, why not. SOX defines“code of ethics” for this purpose as including standards reasonably necessary topromote honest and ethical conduct (including the ethical handling of actual orapparent conflicts of interest), full, accurate and timely disclosure in periodic reportsand compliance with applicable governmental rules and regulations. Prompt disclosuremust also be made of any changes to or waivers of a company’s code of ethics. Thecode of ethics must be filed as an exhibit to the company’s annual report, provided freeof charge to any person who requests it, or posted on the company’s website. If thecompany elects to post its code of ethics on its website, this must be noted in its annualreport and the website address where the code may be accessed must be provided, andamendments and waivers may also be disclosed on the company’s website. NASDAQ-listed companies must, however, disclose any waivers by filing a Form 8-K. Thoughneither SOX nor SEC rules require that public companies in fact adopt a code ofethics, as discussed in the section of this handbook entitled “Stock Exchange Listing

13 Press Release, SEC Seeks Return of $4 million in Bonuses and Stock Sale Profits From Former CEOof CSK Auto Corp. (July 22, 2009), available at http://www.sec.gov/news/press/2009/2009-167.htm

14 See Order at 4 (Dkt. # 49), SEC v. Maynard L. Jenkins, Case No. CV-09-1510-PHX-GMS (D. Ariz.June 9, 2010).

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Requirements,” listed companies may be required to comply with stock exchangerequirements which mandate a code of ethics, such as under the NYSE and NASDAQlisting rules.

ADDRESSING POTENTIAL CONFLICTS OF INTERESTS

Prohibition on Loans to Directors or Officers

Section 402 of SOX generally prohibits a public company from making orarranging for any personal loans to its directors or executive officers. Excluded fromthis prohibition are:

• loans made before SOX’s enactment, so long as the loan is not materiallymodified or renewed thereafter;

• specified home improvement and consumer credit loans made in theordinary course of the company’s business which are of a type generallyoffered to the public and on terms no more favorable than those offered tothe public;

• margin loans by a broker-dealer to its employees which are permitted byapplicable Federal Reserve System rules, are made in the ordinary course ofbusiness, are of a type generally offered to the public and on terms no morefavorable than those offered to the public; and

• any loan made or maintained by an insured depositary institution if the loanis subject to the insider lending restrictions of the Federal Reserve Act.

Section 402’s prohibitions apply from the moment a company becomes public, soa private company considering going public will generally need to discharge allpersonal loans to its directors or executive officers that fall outside the excludedcategories described above before taking that step. Also, before a person is promotedto or becomes a director or executive officer, the person will need to repay anyoutstanding non-excluded loans.

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A number of interpretive issues have arisen with respect to the scope ofSection 402. In the absence of further SEC guidance, a number of practitioners havesuggested that the following types of activities should be considered permissible underSection 402:

• advances of cash, in accordance with company policy, to cover reimbursabletravel and similar expenses incurred in the performance of executive duties;

• personal use of a company credit card or company car if reimbursement isrequired;

• relocation expenses if reimbursement is required;

• “stay” and “retention” bonuses subject to repayment if the employeeterminates employment before the designated date or otherwise fails to meetthe conditions for the bonus;

• indemnification advances for litigation;

• tax indemnity payments to overseas-based executive officers;

• most 401(k) plan or broad-based employee benefit plan loans; and

• certain “cashless” option exercises.

Regulation BTR – Blackout Trading Restriction

Section 306 of SOX and SEC Regulation BTR prohibit a director or executiveofficer of a public company from purchasing, selling or otherwise acquiring ortransferring any of the company’s equity securities (other than exempted securities)during any pension fund “blackout period” with respect to the securities if the personacquires or previously acquired the securities in connection with his or her service oremployment as a director or executive officer.

Practice Tip: The blackout trading restrictions of Regulation BTR do not apply toequity securities acquired under a compensatory plan, contract, authorization orarrangement when the person is an employee, but not a director or executive officer,unless the securities were acquired as part of an inducement to become a director orexecutive officer.

A blackout period is any period of more than three consecutive business daysduring which the ability of not fewer than 50% of the participants or beneficiaries under

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all “individual account plans” maintained by the company to purchase or sell an interestin the company’s securities, such as a 401(k) or other defined contribution plan, istemporarily suspended by the company or by a fiduciary of the plan. The company mustprovide timely notice to its directors and executive officers of any blackout period thattriggers the trading restrictions of Regulation BTR and the reason for the blackout. Inaddition, U.S. domestic companies must promptly notify the SEC of a blackout periodby filing a report on Form 8-K. Foreign private issuers are encouraged to notify the SECof any blackout period by filing a similar report on Form 6-K, but are only required tofile the notice as an exhibit to their annual report on Form 20-F.

Any profits realized by a director or executive officer in connection with a sale orpurchase during a blackout period can be recovered by the company. A company maycommence an action to recapture any profits realized by a director or executive officerfrom transactions which violated Regulation BTR. If a shareholder of the companyrequests it to commence such an action and the company fails to do so within 60 daysof the request, the shareholder may initiate a derivative action to recover the profit onbehalf of the company.

Accelerated Reporting by Section 16 Insiders

SOX Section 403 and related SEC rules accelerated the reporting deadline forpublic company officers, directors and greater than 10% shareholders subject to thebeneficial ownership reporting and short-swing profit rules of Section 16 of theExchange Act. Under these rules, which are discussed more fully in the section of thishandbook entitled “Ownership and Trading Reports by Management and LargeShareholders,” these persons generally must report transactions in the company’sshares and related derivative securities to the SEC within two business days of thereportable transaction. Previously, reporting was generally required within 10 days ofthe end of the month in which the transaction occurred. SOX Section 403 and therelated SEC rules also require that Section 16 reports be filed electronically viaEDGAR.

AUDITOR OVERSIGHT AND INDEPENDENCE

PCAOB Oversight

As noted above, SOX created the PCAOB to register, oversee, regulate, inspectand discipline accounting firms that audit the financial statements of public companies.The PCAOB is subject to SEC oversight, and the SEC appoints the five members ofthe PCAOB in consultation with the Chairman of the Federal Reserve Board of

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Governors and the Secretary of the Treasury. The PCAOB is charged with establishingauditing, quality control, ethics and independence standards for public companyauditors. Under Section 102 of SOX, any accounting firm that audits the financialstatements of a public company must be registered with the PCAOB.

Recent Development: Section 929J of the Dodd-Frank Act amended Section 106of SOX to increase the authority of the SEC and the PCAOB to compel foreignpublic accounting firms to produce their audit work papers and related documentsby subjecting such firms to the jurisdiction of U.S. courts for purposes of enforcinga request for such documents. In addition, Section 929J requires U.S. registeredpublic accounting firms, as a condition to relying on the work of a foreign publicaccounting firm in its audit, to obtain the agreement of the foreign public account-ing firm to produce its audit work papers and related documents to the SEC orPCAOB upon request. A foreign public accounting firm is permitted to meet itsdocument production obligations through alternate means, such as through foreigncounterparts to the SEC or PCAOB. Section 929J deems any willful refusal tocomply with an SEC or PCAOB request for documents to be a violation of SOX.Lastly, Section 981 of the Dodd-Frank Act amends Section 105(b)(5) of SOX topermit the PCAOB to share all documents and information it receives, includingforeign audit work papers, with foreign government regulators or authoritiesempowered by governments to regulate auditors without losing the information’sstatus as confidential or privileged.

Auditor Independence

A key aspect of the SOX reforms were its auditor independence provisions,which are set forth in Title II. These provisions target key aspects of auditorindependence, including the provision of certain non-audit services, the influence ofcompany management on registered public accounting firms and the audit process,conflicts of interest which arise when accounting firm employees become members ofcompany management at former audit clients, and the development of effectivecommunication between a company’s audit committee and its registered publicaccounting firm.

The SEC implemented the SOX auditor independence requirements in large partby amending its previously existing definition of auditor independence in Rule 2-01 ofRegulation S-X. Effectively, if the Rule 2-01 bans on and requirements in respect of

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auditor activities and auditor-client relationships are not observed, the accounting firmwill not be independent for purposes of the SEC’s rules, and therefore will not bequalified to audit the company’s financial statements to be filed with the SEC. TheSEC also adopted Rule 2-07 of Regulation S-X to implement the SOX requirementthat a public company’s independent auditors provide certain reports to the company’saudit committee prior to each filing of an audit report with the SEC. We review theSOX-mandated independence requirements in greater detail below.

Prohibition on Providing Certain Non-Audit Services. The SEC’s auditorindependence rules adopted or amended pursuant to Section 201 of SOX are based onthe following general principles: (i) an auditor cannot audit its own work; (ii) anauditor cannot function in the role of management; and (iii) an auditor cannot serve asadvocate for its client. In keeping with these principles, Section 201 of SOX andrelated SEC rules provide that an accounting firm that is performing any audit for apublic company cannot also provide any of the following types of non-audit servicesto the company:

• bookkeeping or other services related to the accounting records or financialstatements of the company;

• financial information systems design and implementation;

• appraisal or valuation services, including providing fairness opinions orcontribution-in-kind reports;

• actuarial services;

• internal audit outsourcing services;

• management functions;

• human resources services;

• broker-dealer, investment adviser, or investment banking services;

• legal services; and

• expert services unrelated to the audit.

Notwithstanding the general prohibition on these services, SEC rules providelimited exceptions which allow an accounting firm to perform bookkeeping or otherservices related to the accounting records or financial statements of the company,

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financial information systems design and implementation services, appraisal orvaluation services, actuarial services and internal audit outsourcing services if it isreasonable to conclude that the results of these services will not be subject to auditprocedures during the accounting firm’s audit of the company’s financial statements.

In general, audit services include not only audit, review, and attest servicesrequired under the securities laws, but also services related to the issuance of comfortletters, services related to statutory audits, and any services performed to enable theaccounting firm to opine on the company’s financial statements. By contrast, non-auditservices are any professional or consulting services, including tax services, provided toa company by a registered public accounting firm other than in connection with anaudit or a review of the company’s financial statements. Although some have calledfor tax services to be included in the list of prohibited non-audit services, the SEC hasmaintained its long-standing position that an accounting firm can provide tax servicesto its audit clients without impairing the firm’s independence. Nevertheless, the SEChas cautioned audit committees and accountants that in some situations providing taxservices to an audit client may impair the accounting firm’s independence. PCAOBrules adopted in July 2005 list a number of situations in which a registered publicaccounting firm providing tax services to audit clients will not be consideredindependent, including if the accounting firm provides services related to marketing,planning or opining in favor of a tax treatment on a transaction that is based on anaggressive interpretation of applicable tax laws and regulations.

Permitted Non-Audit Services; Pre-Approval of Services. A registered publicaccounting firm may provide non-audit services, including tax services, other than thoseexpressly prohibited (as described above) only if the service is pre-approved by thecompany’s audit committee. A public company’s audit committee is also responsible forpre-approving all audit services provided by the company’s auditors. The auditcommittee may establish pre-approval policies and procedures for the approval of auditand non-audit services. Any such policies and procedures must be detailed as to theparticular service and the audit committee must be informed of each service. SOXestablishes a de minimis exception to the audit committee pre-approval requirement fornon-audit services. The exception provides that audit committee pre-approval is notrequired if: (i) the aggregate amount of all such non-audit services constitutes no morethan 5% of the total amount of the accounting firm’s revenues from the company duringthe fiscal year in which the non-audit services are provided; (ii) the services were notrecognized by the company as non-audit services at the time of the engagement; and (iii)

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the services are promptly brought to the attention of the company’s audit committee andapproved prior to completion of the audit by the committee or by one or more of itsmembers to whom it has granted approval authority.

Disclosure of Non-Audit Services and Audit and Non-Audit Fees. A publiccompany must disclose in its annual report filed with the SEC or its proxy statement:(i) its pre-approval policies with respect to the provision of non-audit services; (ii) anynon-audit services provided by its auditor during the period covered by the report; and(iii) the amount of professional fees paid to the company’s auditor for audit andnon-audit services. The disclosure must show amounts for audit services, audit-relatedservices, tax services and all other services, and the percentage of fees in eachcategory for which the audit committee pre-approval requirement was waived underthe de minimis exception. In addition, the company must describe, in qualitative terms,the types of non-audit services provided.

Accounting Firm Reports to Audit Committee. Prior to a company’s filing ofany audit report with the SEC, the accounting firm issuing the report must reportdirectly to the audit committee on, among other things, all critical accounting policiesand practices used, all alternative GAAP treatments for policies and practices relatedto material items discussed with management, and other material writtencommunications between the accounting firm and management.

Rotation of Audit Partners; Prohibition of Certain Audit Partner Compensation.To address the risk that audit partners with strong links to their audit clients will beunable to exercise objective and impartial judgment in connection with an audit,Section 203 of SOX requires the lead and concurring audit partners with responsibilityfor a company’s audit to rotate at least once every five years. In addition to the five-year rotation for lead and concurring partners, the SEC rules: (i) impose a five-yearcooling-off period before they can re-engage in audits of the client; (ii) require aseven-year rotation, with a two-year cooling-off period, for audit partners (other thanlead or concurring partners) who provide more than 10 hours of service in connectionwith an audit or who are lead partners in connection with the audit of a significantsubsidiary; and (iii) prohibit an accounting firm from compensating an audit partnerbased on his or her procurement of engagements for the accounting firm to providenon-audit services to an audit client during the period of an audit engagement. Therotation requirements do not apply to audit partners who provide limited specialist ortechnical services. Certain small accounting firms are exempt from the rotationrequirements and compensation restrictions.

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Prohibition of Certain Relationships. Consistent with Section 206 of SOX, theSEC expanded its prohibitions on the types of employment relationships that may existbetween an audit client and employees or former employees of its accounting firm andan accounting firm and employees or former employees of its audit clients. The SEC’srules include certain prohibitions on former principals and professional employees ofan accounting firm serving in financial reporting oversight roles for the accountingfirm’s audit clients. The rules also continue to prohibit certain financial relationshipsbetween accounting firms and their clients.

ENHANCED DISCLOSURE REQUIREMENTS

Off-Balance Sheet Transactions and Contractual Obligations

Under Section 401 of SOX and related SEC rules, a public company is requiredto disclose off-balance sheet arrangements that have or are reasonably likely to have amaterial current or future effect on the company’s financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources. The disclosure, which must be in a separatelycaptioned subsection of the MD&A section of the company’s SEC filings, mustprovide a comprehensive explanation of the company’s off-balance sheetarrangements, including (to the extent necessary to an understanding of thearrangement):

• the nature and business purpose of the arrangements;

• the importance of the arrangements to the company for liquidity, capitalresources, market risk or credit risk support, or other benefits;

• the amounts of revenues, expenses, and cash flows arising from thearrangements;

• the nature and amounts of any interests retained, securities issued, oramounts incurred in connection with the arrangements;

• the nature and amounts of any other obligations or liabilities (includingcontingent obligations or liabilities) arising from the arrangements that are orare reasonably likely to become material and the triggering events orcircumstances that could cause them to arise;

• any known event, demand, commitment, trend or uncertainty that will resultin or is reasonably likely to result in the termination or material reduction in

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the availability or benefits to the company of the arrangements, and thecourse of action the company proposes to take in response; and

• any other information the company believes necessary to understand itsoff-balance sheet arrangements and their material effects on the company’sbusiness.

An “off-balance sheet arrangement” is defined to include any transaction,agreement or contractual arrangement to which an entity unconsolidated with thecompany is a party, under which the company has certain obligations or interestsspecified in Item 303(a)(4)(ii) of Regulation S-K, including contingent obligations orinterests. Contingent liabilities arising out of litigation, arbitration or regulatory actionsare not considered to be off-balance sheet arrangements. A company is not required todisclose an off-balance sheet arrangement until it has a definitive agreement for thatarrangement that is unconditionally binding or subject only to customary closingconditions. If no such agreement exists, the disclosure obligation arises when thetransaction is settled.

In addition, a company must provide as part of the MD&A section of its SECfilings an overview of its aggregate contractual obligations in tabular format,categorized as follows:

Payments Due by Period

Contractual Obligations TotalLess than

1 Year 1-3 Years 3-5 YearsMore than

5 YearsLong-tem debt obligationsCapital lease obligationsOperating lease obligationsPurchase obligationsOther long-term liabilities reflected

on the company’s balance sheetunder GAAP

Total

The off-balance sheet transaction and contractual obligation informationdisclosed by a company, other than historical facts, is generally deemed to be a“forward-looking statement” under the statutory safe harbors for forward-lookingstatements provided in Section 27A of the Securities Act and Section 21E of theExchange Act.

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Conditions for Use of Non-GAAP Financial Measures

Section 401(b) of SOX directed the SEC to issue rules requiring non-GAAPfinancial measures included in financial statements, press releases, or other publicdisclosures to be presented in a manner that is not misleading, and which reconcilesthe non-GAAP financial measure with the company’s financial condition and resultsof operation under GAAP. In response, the SEC amended its disclosure rules underRegulations S-K and S-B to impose requirements regarding the presentation ofnon-GAAP financial measures in SEC filings. In addition, the SEC issued RegulationG, which governs a public company’s use of non-GAAP financial measures in any ofits public disclosures. Under Regulation G, public companies that disclose or releasenon-GAAP financial measures must include in the disclosure or release a presentationof the most directly comparable financial measure calculated and presented inaccordance with GAAP, as well as a quantitative reconciliation, either by schedule orother clearly understandable method, of the differences between the non-GAAPfinancial measure presented and the most directly comparable financial measure ormeasures calculated and presented in accordance with GAAP. The SEC’srequirements for the use of non-GAAP financial measures are discussed in greaterdetail in the section of this handbook entitled “Regulation of Analyst Communicationsand Other Voluntary Disclosures.”

Real-Time Disclosure of Information

Section 409 of SOX requires companies to disclose to the public on a rapid andcurrent basis such additional information concerning material changes in financialcondition or operations as the SEC determines is necessary or useful for the protectionof investors and in the public interest. In response to Section 409, the SEC updated itsrequirements for current reporting on Form 8-K to require that additional events bereported on Form 8-K and to accelerate the reporting deadline for certain items. Theserequirements, which are discussed further in the section of this handbook entitled“Periodic and Current Reporting under the Exchange Act,” generally require acompany to report certain material events within four business days of theiroccurrence, except for Regulation FD items and certain other material events forwhich prompt or simultaneous disclosure may be required. Among the reportableevents which were added to Form 8-K as part of the SEC’s response to SOX are:

• any earnings release or announcement disclosing material non-publicfinancial information about completed annual or quarterly fiscal periods;

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• the entry into, termination of, or a material amendment to a materialcontract;

• the incurrence of any material direct or contingent financial obligation(including an off-balance sheet arrangement) and the triggering of anyprovision of that obligation that would increase or result in the accelerationof the company’s liability thereunder;

• any amendment to the company’s organizational documents, such as itsarticles of incorporation or bylaws;

• any event which may result in the company’s shares being delisted;

• certain unregistered sales of the company’s equity securities;

• any material modifications to the rights of the company’s security holders;

• a determination by the company or its independent auditor that thecompany’s security holders can no longer rely on the company’s financialstatements; and

• the appointment or departure of any executive officer or director.

WHISTLEBLOWER PROTECTIONS

In addition to requiring audit committees to implement whistleblower procedures,SOX contains certain additional provisions to protect whistleblowers. Section 806 ofSOX prohibits companies from discriminating or retaliating against an employee forlawfully providing information regarding conduct the employee reasonably believes isa violation of the securities laws or financial fraud statutes to a federal regulatory orlaw enforcement agency, any member or committee of Congress, or a person withsupervisory authority over the employee or authorized by the company to investigatethe conduct. Affected employees are entitled to civil recoveries. Under Section 1107 ofSOX, it is a criminal offense to retaliate against informants for providing truthfulinformation to a law enforcement officer relating to the commission or possiblecommission of a federal offense.

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Recent Development: The Dodd-Frank Act expands the SOX whistleblower pro-tections by:

• extending whistleblower protections to employees of consolidatedsubsidiaries and affiliates of public companies;

• extending the statute of limitations for SOX whistleblower claims from 90 to180 days after the employee became aware of the retaliatory conduct;

• prohibiting the waiver of whistleblower protections by any agreement, policyor condition, including a pre-dispute arbitration agreement; and

• clarifying a whistleblower claimant’s right to a jury trial.

In addition to amending the SOX whistleblower provisions, the Dodd-Frank Actadds extensive new whistleblower protections in Section 21F to the Exchange Act.These provisions are discussed in more detail in the section of this handbookentitled “The Dodd-Frank Wall Street Reform and Consumer Protection Act –Whistleblower Protections.”

ATTORNEY REPORTING AND RELATED CONDUCT RULES

Section 307 of SOX required the SEC to set minimum standards of professionalconduct for attorneys appearing and practicing before the SEC in any way in therepresentation of public companies. The SEC issued standards which require any suchattorney to report evidence of a material violation of United States federal or statesecurities laws, a material breach of fiduciary duty arising under United States federalor state law or similar material violations of United States federal or state law by thecompany or any of its officers, directors, employees or agents. In general, the reportmust be made to the company’s chief legal officer (CLO). If a company does not havea CLO, its CEO is deemed to be the CLO. If the CLO does not provide an appropriateresponse to the attorney’s report, the attorney must report the evidence “up the ladder”to the company’s audit committee, to another committee comprised solely ofindependent directors if the company does not have an audit committee, or the entireboard of directors if the company has no independent board committee.

If a company has established a qualified legal compliance committee (QLCC), theattorney may make its initial report to the QLCC instead of the CLO. If the attorneymakes its initial report to the QLCC or if the CLO refers the attorney’s initial report to

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the QLCC, the attorney will not be required to make any further report. The rulesestablish certain reporting responsibilities as between supervising attorneys and theirsubordinates. The rules apply to in-house lawyers as well as outside counsel.

Practice Tip: An attorney that is retained by a company to investigate evidence of amaterial violation, or to defend it (or its officers, directors, employees or agents) in aproceeding relating to evidence of a material violation, may be required to complywith the reporting obligations unless the attorney is retained by a QLCC and certainother conditions are satisfied.

FORM OF SECTION 302 CERTIFICATION

I, [identify the certifying individual], certify that:

1. I have reviewed this [specify report] of [identify registrant];

2. Based on my knowledge, this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial informationincluded in this report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined inExchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosurecontrols and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused suchinternal control over financial reporting to be designed under our

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supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls andprocedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of theperiod covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control overfinancial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report)that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our mostrecent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design oroperation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process,summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant’s internal controlover financial reporting.

Date:

[Signature][Title]

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STOCK EXCHANGE LISTING REQUIREMENTS

Companies with securities listed on a stock exchange must comply with thelisting requirements of the applicable stock exchange in addition to applicable federalsecurities laws and related SEC rules and regulations. Listing rules vary fromexchange to exchange, and require compliance with certain quantitative criteria suchas minimum numbers of security holders, publicly held shares, share price and publicfloat, as well as certain corporate governance and responsibility and public disclosurerequirements. Failure to comply with applicable stock exchange listing standardswould subject a listed company to de-listing1.

This section of this handbook outlines the principal corporate governance andresponsibility and public disclosure requirements a company must satisfy in order tomaintain its continued listing on the New York Stock Exchange and the NASDAQ StockMarket, the dominant stock exchanges in the United States. This handbook does notaddress initial listing requirements that a company must satisfy in order to be acceptedfor listing initially on a stock exchange or financial and other quantitative standardsapplicable for continued listing. Under the Dodd-Frank Act, enacted in July 2010, theNYSE and NASDAQ will be required to adopt certain amendments to their corporategovernance listing standards, following rulemaking by the SEC. These amendments arereflected in the discussions that follow. See also the section of this handbook entitled“Dodd-Frank Wall Street Reform and Consumer Protection Act” for further discussionof the corporate governance requirements under the Dodd-Frank Act.

NYSE RULES

Corporate Governance

Majority of Independent Directors; Definition of Independence. A majority ofthe members of the board of directors of a NYSE listed company must qualify as“independent directors.”

For a director to qualify as independent for this purpose, the board mustdetermine that the director has “no material relationship with the listed company(including any parent or subsidiary in a consolidated group).” A material relationshipmay include a commercial, industrial, banking, consulting, legal, accounting,charitable or familial relationship. However, significant stock ownership is not, by

1 In light of continuing adverse market conditions, which have resulted in many companies falling outof compliance with listing requirements, national securities exchanges have amended certain of their rulesto provide for increased leniency and flexibility in continued listing and compliance requirements.

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itself, a material relationship. The NYSE has enumerated the following relationshipsthat disqualify a director from being independent:

(a) the director is, or has been within the last three years, an employee of thecompany, or has an immediate family member who is, or has been during the last threeyears, an executive officer of the company, although employment as interim chairman, CEO oranother executive officer will not disqualify a director from being independent following thatemployment;

(b) the director or an immediate family member received more than $120,000 ofdirect compensation from the company in any 12-month period during the past threeyears (excluding board and committee fees and pension or other deferredcompensation for prior service, provided that the compensation is not contingent oncontinued service);

(c) either (A) the director is a current partner or employee of a firm that is thecompany’s internal or external auditor; (B) the director has an immediate familymember who is a current partner of such a firm; (C) the director has an immediatefamily member who is a current employee of such a firm and personally works on thecompany’s audit; or (D) the director or an immediate family member was within thelast three years a partner or employee of such a firm and personally worked on thecompany’s audit within that time;

(d) the director or an immediate family member is, or has been with the lastthree years, employed as an executive officer of another company where any of thelisted company’s present executive officers at the same time serves or served on thatcompany’s compensation committee; or

(e) the director is a current employee, or has a family member that is a currentexecutive officer, of another company that made payments to, or received paymentsfrom, the listed company that exceeded, in any of the past three fiscal years, the greaterof $1 million and 2% of the other company’s consolidated gross revenues.

In computing compensation under (b), the following compensation need not beincluded: (i) compensation paid to the director for prior employment as interimchairman, CEO or other executive officer, and (ii) compensation paid to an immediatefamily member for employment as an employee of the listed company (other than asan executive officer). For purposes of (e), contributions by a listed company totax-exempt organizations are not considered payments. The listed company must,

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however, disclose any such contributions it makes to any tax-exempt organization inwhich any independent director serves as an executive officer if, within the precedingthree years, contributions in any single fiscal year from the listed company to theorganization exceeded the greater of $1 million or 2% of such tax-exemptorganization’s consolidated gross revenues.

It is important to note that compliance with the bright line rules is not enough toensure compliance with the independence standards. The board is required to considerall facts and circumstances relevant to determining whether a director is independentof company management. The board should also analyze not just the board member’sor nominee’s relationship to the listed company, but also the relationship to the listedcompany of organizations with which the board member or nominee is affiliated.

Practice Tip: A director’s independence may be impaired not just by immediatefamily relationships, but also by personal relationships with members of seniormanagement. The commentary to NYSE Rule 303A.02 notes that the focus of theevaluation is independence from management. Accordingly, relationships betweena director and a member of senior management that are material to either partyshould be considered by a board of directors in evaluating a director’sindependence.

Board Executive Sessions. The non-management directors of a NYSE listedcompany must meet at regularly scheduled executive sessions without management.Instead of regularly scheduled non-management executive sessions, the board of aNYSE listed company may hold regularly scheduled executive sessions of itsindependent directors. A board that satisfies its executive session requirements withnon-management directors’ sessions must, in addition, hold an executive session ofonly independent directors at least once a year. A NYSE listed company is required toestablish a method for shareholders and other interested parties to communicatedirectly with the company’s non-management or independent directors. Companiesmay utilize the same whistleblower procedures established by their audit committees,as required by SEC rules, to satisfy this NYSE requirement.

Nominating/Corporate Governance Committee. The board of a NYSE listedcompany must have a nominating/corporate governance committee composed entirelyof independent directors. The nominating/corporate governance committee must have

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a written charter that addresses its purpose and responsibilities, as well as an annualself-evaluation. At a minimum, the responsibilities of the nominating/corporategovernance committee must be to: (i) identify qualified director nominee candidates,consistent with criteria approved by the board; (ii) select or recommend that the boardselect director nominees for the annual shareholders’ meeting; (iii) develop andrecommend to the board corporate governance guidelines; and (iv) oversee theevaluation of the board and management. If a listed company is legally required bycontract or otherwise to provide third parties with the ability to nominate directors (forexample, preferred stock rights to elect directors upon a dividend default, shareholderagreements and management agreements), the selection and nomination of suchdirectors need not be subject to the nominating committee process.

Compensation Committee. The board of a NYSE listed company must have acompensation committee composed entirely of independent directors. Thecompensation committee must have a written charter that addresses its purpose andresponsibilities, as well as an annual self-evaluation. At a minimum, theresponsibilities of the compensation committee must be to: (i) review and approvecorporate goals and objectives relevant to CEO compensation, evaluate the CEO’sperformance and, either as a committee or together with other independent directors(as directed by the board), determine the CEO’s compensation; (ii) makerecommendations to the board with respect to non-CEO executive officercompensation, as well as incentive-compensation and equity-based plans that aresubject to board approval; and (iii) prepare the compensation committee reportrequired to be included in the company’s proxy statements under SEC rules, asdiscussed further in the section of this handbook entitled “Proxy Statement and AnnualReport Disclosures and Process.”

In addition to the compensation committee independence requirements underexisting NYSE rules, Section 952 of the Dodd-Frank Act requires that, with certainexceptions, each member of a public company’s compensation committee must be anindependent member of the board of directors. The Dodd-Frank Act further directs theSEC to define independence by considering several factors; as a result, SECrulemaking in furtherance of this new requirement may impose independencerequirements for compensation committee members in addition to those set forth underexisting NYSE rules. Section 952 of the Dodd-Frank Act also provides new authorityfor compensation committees to retain independent advisors, requires that thecommittees consider several factors that may affect the independence of those advisors

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and requires disclosure regarding the independence of compensation consultantsretained by the committees. These provisions are discussed in more detail in thesections of the Dodd-Frank Wall Street Reform and Consumer Protection Act chapterof this handbook entitled “Compensation Committee Independence and Authority toRetain Advisors” and “Compensation Consultants and Advisors.”

Audit Committee. The board of a NYSE listed company must have an auditcommittee of at least three members. Each member of the audit committee must be anindependent director. In order to be independent, a director must be independentaccording to the NYSE standard discussed above, and must also satisfy theindependence criteria adopted by the SEC pursuant to SOX (which, as discussedfurther in the section of this handbook entitled “The Sarbanes-Oxley Act,” means,generally, that the director cannot receive any payment from the company other thanfor board or committee service and cannot be an “affiliated person” of the company orany subsidiary). Each member of the audit committee must also be or, within areasonable period of time following appointment, must become “financially literate,”and at least one member must have “accounting or related financial managementexpertise.” The board has discretion, in the exercise of its business judgment, tointerpret whether a director is financially literate or has accounting or related financialmanagement expertise. The NYSE rules do not require that the audit committee of aNYSE listed company include members that are “financial experts” (as defined in theSEC rules). However, the board of a NYSE listed company may presume that a personwho is an “audit committee financial expert” as defined by the SEC has the“accounting or related financial management expertise” required by the NYSE rule. Ifa director serves on the audit committees of more than three public companies, theboard must determine that this simultaneous service would not impair the director’sability to serve effectively on the company’s audit committee.

The audit committee must have a written charter which addresses the auditcommittee’s purpose and responsibilities, as well as an annual self-evaluation. At aminimum, the purpose of the audit committee must be to: (i) assist board oversight ofthe integrity of the company’s financial statements and compliance with legal andregulatory requirements, independent auditor’s qualifications and independence andthe performance of the company’s internal audit function and external auditors; and(ii) to prepare the audit committee reports required to be included in the company’speriodic SEC filings. The responsibilities of the audit committee must include, at aminimum, the auditor oversight, whistleblower and advisor engagement and funding

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requirements set forth in the SEC rules (which are discussed in the section of thishandbook entitled “The Sarbanes-Oxley Act”), as well as certain additional obligationsset forth in the NYSE rules.

Corporate Governance Guidelines. The NYSE requires all listed companies toadopt corporate governance guidelines, which must address the following subjects:

• director qualification standards;

• director responsibilities;

• director access to management and independent advisors;

• director compensation;

• new director orientation and continuing education for the board;

• management succession; and

• an annual self-evaluation by the board.

Code of Business Conduct and Ethics. While SOX and related SEC rulesrequire public companies to disclose whether they have adopted a code of ethics, underthe NYSE rules, a listed company must in fact adopt a code of business conduct andethics for its directors, officers and employees. At a minimum, a company’s code ofbusiness conduct and ethics must address:

• conflicts of interest;

• corporate opportunities;

• confidentiality;

• fair dealing;

• protection and proper use of company assets;

• compliance with laws, rules, and regulations (including insider tradinglaws); and

• proactive reporting of any illegal or unethical behavior.

Waivers of a company’s code of business conduct and ethics for its directors andexecutive officers may be granted only by the company’s board or a board committee.

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NYSE Certifications. The CEO of each listed company must certify to theNYSE that he or she is not aware of any violation by the company of the NYSE’scorporate governance listing standards, except to the extent described in thecertification. The CEO must also promptly notify the NYSE in writing after anyexecutive officer of the company becomes aware of any non-compliance with thecorporate governance listing standards. In addition, each listed company must submitan executed Annual Written Affirmation to the NYSE affirming its compliance ornon-compliance with the NYSE’s corporate governance listing standards and, as andwhen required by the applicable NYSE form, an interim Written Affirmation. Whilethe CEO certification form is a one page document, the affirmation requires that thecompany provide the NYSE with extensive information detailing its compliance (orany failure to comply) with the applicable requirements. Copies of the forms ofcertificate and affirmation can be found on the NYSE website at:http://www.nyse.com/regulation/nyse/1101074752859.html.

Certain Exemptions. The NYSE permits the following exemptions from itscorporate governance standards:

Controlled Companies. A “controlled company,” which is a company with amajority of the voting power for the election of directors held by an individual, a groupor another company, is not required to have a majority of independent directors on itsboard, or to have a nominating/corporate governance or compensation committee.

Foreign Private Issuers. Companies meeting the SEC’s definition of “foreignprivate issuers” are permitted to follow their home country practice in lieu of theNYSE’s corporate governance standards. They must, however, designate an auditcommittee that satisfies the auditor oversight, whistleblower and advisor engagementand funding requirements set forth in Exchange Act Rule 10A-3 adopted by the SEC,and the members of which are independent according to the standard expressed in thesame rule. In addition, they must publicly disclose any significant differences betweentheir home country corporate governance practices and the NYSE’s corporategovernance listing standards, and must comply with the NYSE rule requiringnotification of non-compliance and written affirmations in respect of the NYSE’scorporate governance listing standards.

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Shareholder Approval of Corporate Action; Shareholder Meetings

In addition to any applicable shareholder approval requirements under state orfederal law, the NYSE requires shareholder approval of the following corporationactions, subject to certain exceptions:

• adoption of and “material revisions” to equity compensation plans (whichincludes individual compensation arrangements);

• certain issuances of common stock (or securities convertible into or exercisefor common stock) exceeding 1% of the number of shares of common stockor the voting power outstanding, to a director, officer or substantial securityholder (which will not include a holder of less than 5% of the number ofshares of common stock or the voting power outstanding), a subsidiary,affiliate or other closely-related person to any of such persons or anycompany or entity in which any of such persons has a substantial direct orindirect interest (which will not include an interest of less than 5% of thenumber of shares of common stock or the voting power outstanding);

• issuance of common stock (or securities convertible into or exercisable forcommon stock) equal to or exceeding 20% of the number of shares ofcommon stock or the voting power outstanding, except for the followingissuances: (i) a public offering for cash; or (ii) a bona fide private financingwhere the issue price (or if convertible or derivative securities are issued, theconversion or exercise price) is payable in cash and equals or exceeds eachof the book value and the market value of the common stock; and

• any issuance that will result in a change of control of the company.

A “material revision” of an equity compensation plan may include increasing thenumber of shares available, expanding the types of awards available, expanding theclass of persons eligible to participate, extending a plan’s term, changing the methodof determining the exercise price of options under the plan, re-pricing stock options ifthe plan does not permit it or changing the plan to permit the re-pricing of options. Aplan that does not contain a provision that specifically permits repricing of options willbe considered for purposes of this listing standard as prohibiting repricing.Accordingly, any actual repricing of options will be considered a material revision ofthe plan even if the plan itself is not revised. A change in the method of determining“fair market value” from the closing price on the date of grant to the average of the

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high and low price on the date of grant is an example of a change that the NYSEwould not view as a material revision. An amendment that curtails rather than expandsthe scope of a plan is also not considered a material revision.

Certain employment related awards, plans and amendments are exempt from theNYSE shareholder approval requirement. To be exempt such an award, plan oramendment must be approved by the listed company’s independent compensationcommittee or a majority of its independent directors. The company must notify theNYSE when it is relying on one of these exemptions. The following awards, plans andamendments are generally exempt from the shareholder approval requirements:

• grants of options or other equity-based compensation as a materialinducement to a person being hired or rehired following a bona fide periodof employment interruption (and promptly following which the listedcompany must disclose, in a press release, the material terms of the award,including the recipient and the number of shares involved in the grant);

• changes to convert, replace or adjust outstanding options or other equitycompensation awards, in order to reflect a merger or acquisition transaction;

• grants with respect to equity of a listed company based on shares availableunder a pre-existing equity compensation plan of a company merged into oracquired by the listed company, where the acquired company is not a listedcompany following the merger or acquisition transaction and the pre-existing plan had been approved by its shareholders, provided that, (A) thenumber of shares available for grants must be appropriately adjusted toreflect the merger or acquisition transaction, (B) the time during which theshares are available cannot be extended beyond the period of availabilityunder the pre-existing plan, and (C) awards cannot be granted to personswho, immediately before the merger or acquisition transaction, wereemployed by the listed company or its subsidiaries; and

• tax qualified plans meeting the requirements of Section 401(a) or Section423 of the Internal Revenue Code and certain “parallel excess plans,” whichare “pension plans” under ERISA that are designed to provide excessbenefits in conjunction with qualified plans under Section 401(a) andamendments to such plans.

To qualify for the exemption for pre-existing plans, the plan cannot be adopted incontemplation of the merger or acquisition transaction. Moreover, shares reserved for

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listing in connection with a transaction pursuant to either of the merger or acquisitionrelated exemptions must be included when determining whether 20% or more of thelisted company’s shares are being issued in connection with the transaction andtherefore, whether shareholder approval is required under the separate requirement forshareholder approval of such issuances.

The “market value” of the company’s common stock is defined as the last officialclosing price on the NYSE prior to the binding agreement to issue the securities.Companies are not permitted to vary this calculation. Shareholder approval is requiredfor the issuance of convertible securities that may convert into 20% or more of thecompany’s common stock or voting power no matter how unlikely it is that the shareissuance might result in the issuance of a number of shares that equal or exceed the20% threshold.

A listed company may apply for an exception to the shareholder approvalrequirements when the delay in securing shareholder approval would seriouslyjeopardize the financial viability of the enterprise. The company’s audit committeemust expressly approve the company’s reliance on this exception. A company relyingon this exception must mail to its shareholders written notice of its omission to seekshareholder approval and of the audit committee’s express approval of the exception.The notice must be mailed no later than 10 days before issuance of the securities forwhich shareholder approval was not sought.

The NYSE mandates certain other procedures relating to shareholder voting.Listed companies must hold an annual shareholders’ meeting during each fiscal year,and solicit proxies and provide proxy statements for all shareholders’ meetings.

As discussed in more detail in the section of this handbook entitled “ProxyStatement and Annual Report Disclosures and Process – Broker Voting,” manyshareholders hold their shares through “street name” arrangements, where shareholdersretain beneficial ownership, but their banks, brokers or other nominees serve asregistered owners of the shares. The registered owners then typically vote atshareholders’ meetings based on instructions received from the beneficial owners.Registered owners that are member organizations of the NYSE, which generallyinclude broker-dealers that are members of FINRA, may also vote on certain routineproposals even if beneficial owners of the shares do not provided specific votinginstructions. Historically, routine proposals included non-contested director electionsand executive compensation matters, such as shareholder advisory votes on executive

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compensation (or “say-on-pay”). However, in 2009, the NYSE amended its rules toprohibit its member organizations from voting without specific client instructions ondirector elections and consistent with the discretionary voting restrictions in Section957 of the Dodd-Frank Act, the NYSE has more recently amended its rules to prohibitmember organizations from voting shares without specific client instructions onmatters related to executive compensation.

Review of Related Party Transactions

The NYSE rules require that an “appropriate group” within a listed company reviewand evaluate each related party transaction. The company must determine whether or nota particular relationship serves the best interest of the company and its shareholders andwhether it should be continued or eliminated. The NYSE rules do not specify who shouldcomprise the “appropriate group” to review related party transactions; however, the rulesindicate that the audit committee or a comparable body would be appropriate.

Public Disclosure and NYSE Notification

NYSE listed companies must promptly notify the NYSE of any non-compliancewith the NYSE’s corporate governance listing standards. Listed companies must alsopublicly disclose their nominating/corporate governance, compensation and auditcommittee charters and their codes of business conduct and ethics, as well as anywaivers of their codes of business conduct and ethics. The NYSE requires that certaindocuments and information be posted on a listed company’s website, and generallypermits other documents and information to be disclosed with website postings. Certaindisclosures must, however, be contained in a listed company’s SEC filings. TheJanuary 1, 2010 amendments to the NYSE’s corporate governance standards expandedthe ability of NYSE-listed companies to make corporate governance related disclosureson their websites.

Under the NYSE rules, “a listed company is expected to release quickly to thepublic any news or information which might reasonably be expected to materiallyaffect the market for its securities.” The NYSE views this expectation as one of thefundamental purposes of its listing agreement. The NYSE lists the following events asindicative of circumstances that should be immediately disclosed: annual and quarterlyearnings, dividend announcements, mergers, acquisitions and tender offers, stocksplits, major management changes, and any substantive items of unusual ornon-recurrent nature. News of the following occurrences will also often require

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immediate disclosure: major new products, contract awards, expansion plans, anddiscoveries. Under the NYSE rules, a “listed company should also act promptly todispel unfounded rumors that result in unusual market activity or price variations.”The disclosure must be made in a Regulation FD compliant manner. Refer to thesection of this handbook entitled “Regulation of Analyst Communications and OtherVoluntary Disclosures” for discussion of Regulation FD. A company may delay orrefrain from the described public disclosures in certain limited circumstances.

The NYSE rules discuss certain timing and telephonic notification requirementsin connection with required disclosures. These requirements are intended to ensuretimely public disclosure. They also permit the NYSE to consider the potential impactof a pending disclosure on trading in a listed company’s securities, and whethertrading should be temporarily halted.

In addition to complying with the NYSE’s public disclosure requirements,NYSE listed companies must give the NYSE prompt or advance written notice ofcertain actions and events, including changes in transfer agent or registrar, auditors,collateral securing listed securities and, directors and executive officers; dividends andstock splits; and the record date for shareholders’ meetings.

NASDAQ RULES

The NASDAQ Stock Market has a three market tier classification system forlisted issuers, which consists of The NASDAQ Global Market, The NASDAQ GlobalSelect Market and The NASDAQ Capital Market. These market tiers are differentiatedby their initial and maintenance listing standards, with the Global Select Markethaving the most stringent standards. While each NASDAQ market tier has differentquantitative initial and maintenance listing standards, NASDAQ listed issuers aregenerally required to comply with the same corporate governance and publicdisclosure requirements.


Board of Directors; Definition of Independence. The board of directors of eachNASDAQ listed company is required to have a majority of “independent” directors.

In order for a director to be independent under NASDAQ rules, the board ofdirectors must make an affirmative determination that no relationship exists that, in theopinion of the board, would interfere with the director’s ability to exercise independent

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judgment in carrying out his or her responsibilities as a director. NASDAQ rulesprovide that a director cannot be independent if the director:

• is, or at any time during the past three years was, employed by the company(which includes, for purposes of NASDAQ’s independence rules, any parentand controlled consolidated subsidiary of the company);

• accepted or has a family member who accepted any compensation from thecompany in excess of $120,000 during any period of twelve consecutivemonths within the three years preceding the determination of independence,other than:

O compensation for board or board committee service,

O compensation paid to a family member who is an employee (other thanan executive officer) of the company, or

O benefits under a tax-qualified retirement plan, or non-discretionarycompensation;

• is a family member of an individual who is, or at any time during the pastthree years was, employed by the company as an executive officer;

• is, or has a family member who is, a partner in, or a controlling shareholder oran executive officer of, any organization to which the company made, or fromwhich the company received, payments for property or services in the currentor any of the past three fiscal years that exceed 5% of the recipient’s con-solidated gross revenues for that year, or $200,000, whichever is more, otherthan payments arising solely from investments in the company’s securities, orpayments under non-discretionary charitable contribution matching programs;

• is, or has a family member who is, employed as an executive officer ofanother entity where at any time during the past three years any of theexecutive officers of the company served on the compensation committee ofthat other entity; or

• is, or has a family member who is, a current partner of the company’s outsideauditor, or was a partner or employee of the company’s outside auditor whoworked on the company’s audit at any time during any of the past three years.

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For purposes of NASDAQ’s independence rules, a family member of a personincludes that person’s spouse, parents, children and siblings, whether by blood oradoption, and in-laws (mother-, father-, sister- and brother-in-law) or anyone residingin that person’s home.

Executive Sessions of Independent Directors. The independent members of theboard are required to meet in regularly scheduled executive sessions, outside of thepresence of management. NASDAQ suggests (but does not require) that theseexecutive sessions be held at least twice a year in conjunction with regularly scheduledboard meetings.

Director Nominations. NASDAQ requires any nominee for election as adirector be selected (or recommended to the full board for selection) by either amajority of the board’s independent directors or a nominating committee comprisedsolely of independent directors. Independent directors do not need to be involved inthe selection of a director nominated by a third party who has the legal right to makesuch a nomination. NASDAQ listed companies must adopt a nominating committeecharter, or in the absence of a nominating committee, a board resolution, that addressesthe nominations process and any related matters required to be addressed under federalsecurities laws.

Executive Compensation. NASDAQ rules require that the compensation of alisted company’s executive officers, including its chief executive officer, bedetermined (or recommended to the full board for determination) by either a majorityof the board’s independent directors or a compensation committee comprised solely ofindependent directors. Under NASDAQ rules, the chief executive officer may not bepresent during any voting or deliberations relating to his or her compensation. Asdiscussed above with respect to the compensation committees of NYSE listedcompanies, Section 952 of the Dodd-Frank Act imposes new independencerequirements on the compensation committees of public companies as well as otherprovisions relating to the advisors of such committees. As a result, NASDAQ listedcompanies will be required to establish independent compensation committees whichwould have authority to operate in a manner similar to their audit committees, inaccordance with SEC rules to be adopted. These provisions are discussed in moredetail in the sections of the Dodd-Frank Wall Street Reform and Consumer ProtectionAct chapter of this handbook entitled “Compensation Committee Independence andAuthority to Retain Advisors” and “Compensation Consultants and Advisors.”

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Audit Committee. Each NASDAQ listed company must have an auditcommittee comprised of at least three members, each of whom must:

• be independent, as defined under both NASDAQ rules and, as is the case forNYSE listed companies, Rule 10A-3(b)(1) under the Exchange Act (whichmeans, generally, that the director cannot receive any payment from thecompany other than for board or committee service and cannot be an“affiliated person” of the company or any subsidiary);

• not have participated in the preparation of the financial statements of thecompany or any of its current subsidiaries at any time during the past threeyears; and

• be able to read and understand fundamental financial statements, including abalance sheet, income statement and cash flow statement.

At least one member of the audit committee must be “financially sophisticated”by virtue of either past employment experience in finance or accounting, a requiredprofessional certification in accounting, or any other comparable experience orbackground, including experience as a chief executive officer, chief financial officer orother senior officer with financial oversight responsibilities.

The board of each NASDAQ listed company must adopt a formal written auditcommittee charter and the adequacy of that charter must be reviewed and reassessedby the audit committee on an annual basis. The audit committee charter must specify:

• the scope of the audit committee’s responsibilities, and how it carries out thoseresponsibilities, including structure, processes, and membership requirements;

• the audit committee’s responsibility for:

O ensuring its receipt of a formal written statement from the company’soutside auditor identifying all relationships between the auditor and thecompany, consistent with Independence Standards Board Standard 1,2

O actively engaging in a dialogue with the auditor with respect to anydisclosed relationships or services that may impact the objectivity andindependence of the auditor, and

2 The Independence Standards Board is an independent standard setting body that was established bythe American Institute of Certified Public Accountants to establish independence standards applicable toaudits of public companies.

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O taking, or recommending that the full board take, appropriate action tooversee the independence of the outside auditor.

• the audit committee’s purpose of overseeing the accounting and financialreporting processes of the company and the audits of its financial statements; and

• the specific responsibilities and authority necessary to comply withrequirements for audit committees set forth in SOX (as implemented in Rule10A-3(b) under the Exchange Act), which are discussed further in thesection of this handbook entitled “The Sarbanes-Oxley Act”, concernresponsibilities relating to:

O registered public accounting firms,

O complaints relating to accounting, internal accounting controls orauditing matters,

O the authority to engage advisors, and

O funding as determined by the audit committee.

Independence Requirements: Cure Periods and Exceptions. A listed companymust immediately notify NASDAQ upon learning that it is not in compliance with anyNASDAQ listing standards, including those relating to the number of independentdirectors on the board or the audit committee. NASDAQ rules provide a listedcompany with the opportunity to cure any such noncompliance caused by a vacancy orcertain events that are outside of the company’s reasonable control.

NASDAQ permits listed companies, under exceptional and limitedcircumstances, to appoint one director who is not independent (but who is not a currentofficer or employee of the company, or a family member of an officer or employee) toa nominating committee or a compensation committee that is comprised of at leastthree members, provided in each case that:

• the board has determined that such individual’s membership on thecommittee is in the best interests of the company and its shareholders; and

• the board discloses, in the proxy statement for the next annual meeting ofshareholders, the nature of the relationship and the reasons for the board’sdetermination.

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Any member of the nominating or compensation committee who is appointedunder this exception may not serve longer than two years.

Additionally, any NASDAQ listed company that is a “controlled company” –where a majority of the voting power for its directors is held by an individual, group, orentity – is not required to satisfy NASDAQ’s independence rules regarding boardcomposition, the selection of director nominees and the determination of executivecompensation. Any listed company relying on this exemption must disclose in its proxystatement that it is a controlled company and its basis for making such a determination.

Code of Conduct. Each NASDAQ listed company must adopt, and makepublicly available, a code of conduct that is applicable to all of its directors, officersand employees. The code of conduct must qualify as the “code of ethics” contemplatedby SOX, as discussed further in the section of this handbook entitled “The Sarbanes-Oxley Act.” The board of directors must approve any waiver of the code of conductfor directors and executive officers and all such waivers must be disclosed in a Form8-K, or for a foreign private issuer, in a Form 6-K or its next Form 20-F or 40-F. Thecode of conduct is required to contain an enforcement mechanism that ensures promptand consistent enforcement, protection for persons who report potential violations,clear and objective standards for compliance and a fair process for determiningwhether violations have occurred.

Shareholder Meetings. NASDAQ listed companies must hold an annualmeeting of shareholders no later than one year after the end of its fiscal year. Inconnection with the solicitation of proxies for any meeting of shareholders, a listedcompany must deliver to shareholders a proxy statement that complies with allapplicable SEC rules and requirements and provide copies of the proxy statement toNASDAQ. A quorum for any such meeting, as set forth in the company’s bylaws, maynot be less than 33 1/3% of the outstanding shares of the company’s voting stock.

Review of Related Party Transactions. Each NASDAQ listed company, throughits audit committee or another independent body of the board, must conduct anappropriate review and provide oversight of all related party transactions for potentialconflicts of interest. For purposes of this rule, the term “related party transaction” refersto transactions required to be disclosed pursuant to Item 404 of Regulation S-K, whichincludes any financial transaction, arrangement or relationship involving the company(including any indebtedness or guarantee of indebtedness) in which the amount involvedexceeds $120,000, and in which any related person had or will have a direct or indirect

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material interest. Item 404 of Regulation S-K is discussed further in the section of thishandbook entitled “Periodic and Current Reporting under the Exchange Act.”

Shareholder Approval Requirements. NASDAQ listed companies must obtainshareholder approval prior to issuing securities:

• for any acquisition that requires the issuance of 20% or more of thepre-transaction outstanding shares of the company, or 5% or more of thepre-transaction outstanding shares when a related party has a 5% or greaterinterest in the acquisition target;

• when the issuance would result in a change of control;

• as equity-based compensation for officers, directors, employees orconsultants; and

• in private placements at a price less than the greater of book or market value,where the issuance (together with sales by officers, directors, or substantialshareholders, if any) equals 20% or more of the pre-transaction outstandingshares.

Subject to limited exceptions, NASDAQ requires that shareholders approve anyequity compensation plan or arrangement pursuant to which an officer, director,employee or consultant may receive stock. Once an equity compensation plan orarrangement has been approved by shareholders, any material amendment to that planor arrangement would also require shareholder approval. For example, shareholderapproval would be required for:

• any material increase in the number of shares to be issued under an equitycompensation plan,

• any material change that increases benefits to plan participants, such as achange to permit a repricing of outstanding options or to extend the durationof the plan;

• any material expansion of the class of eligible participants in the plan; and

• any expansion in the types of equity awards provided for under the plan.

NASDAQ will generally not require shareholder approval for inducement grantsto new employees or grants that are made pursuant to tax qualified non-discriminatorybenefit plans or parallel nonqualified plans, provided in each case that those grants are

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approved by an independent compensation committee or a majority of the board’sindependent directors. In addition, shareholder approval may not be required (i) toconvert, replace or adjust outstanding options or other equity compensation awards toreflect a merger or acquisition, or (ii) to use shares available under certain plansacquired in such a transaction for certain post-transaction grants.

Practice Tip: NASDAQ’s shareholder approval requirements apply not just tobroad-based equity compensation plans, but also to any “arrangement” that couldresult in the receipt of stock by an officer, director, employee or consultant. Forexample, options or stock granted to an officer or employee pursuant to the termsof an employment agreement or other arrangement should ordinarily be issuedpursuant to a shareholder approved plan, unless the grant is an inducement offeredto a new employee or another exception applies.

Shareholder approval is not required for any “public offering” of securities, whichgenerally includes any firm commitment underwritten securities offering that has beenregistered with the SEC (or a registered offering that has been publicly disclosed anddistributed in the same general manner and extent as a firm commitment underwrittensecurities offering).

A listed company may also apply in writing for an exception to the shareholderapproval requirements for a specified issuance of securities when:

• the delay required to obtain stockholder approval would seriously jeopardizethe financial viability of the enterprise; and

• the audit committee (or another designated group of disinterested,independent directors) expressly approves the company’s reliance on thisexception.

If NASDAQ approves the exception, the company must mail to shareholders andpublicly announce certain information relating to its issuance of securities and relianceon this exception.

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Practice Tip: Special care should be taken to ensure that shareholder approval isnot required in connection with a private placement of “Future Priced Securities,”which are convertible securities that have a conversion price that is generallylinked to a percentage discount to the market price of the underlying commonstock. When required, shareholder approval must be obtained prior to the issuanceof the Future Priced Securities (and not the underlying common stock). The lowerthe price of the underlying common stock at the time of conversion, the moreshares into which the Future Priced Security is convertible. When determiningwhether shareholder approval is required for an issuance of Future PricedSecurities, NASDAQ will look to the maximum potential issuance of shares uponconversion (no matter how unlikely the outcome) to determine whether there willbe an issuance of 20% or more of the issuer’s outstanding common stock.

In accordance with the broker voting restrictions set forth in the Dodd-Frank Act,NASDAQ has revised its broker voting rules to prohibit brokers from voting sharesthey do not beneficially own in matters regarding the election of directors, executivecompensation and any other “significant matter,” as determined by the SEC, withoutspecific voting instructions from beneficial owners. The Dodd-Frank Act provisionand the NASDAQ rule change are discussed in more detail in the section of thishandbook entitled “Proxy Statement and Annual Report Disclosures and Processes –Broker Voting.”

Exemption for Foreign Private Issuers

Subject to certain conditions, a foreign private issuer may follow its homecountry corporate governance practices in lieu of complying with certain ofNASDAQ’s corporate governance requirements. As one of the conditions to takingadvantage of this exemption, a foreign private issuer must have an audit committeethat complies with NASDAQ’s audit committee requirements, except that thecommittee members’ independence may be determined only by reference to theindependence standards in Exchange Act Rule 10A-3 (subject to any relevantexceptions thereunder), without reference to NASDAQ’s additional independencerequirements.

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Communications and Disclosure

A NASDAQ listed company must (except in unusual circumstances) promptlydisclose any material information that would reasonably be expected to affect thevalue of its securities or influence investors’ decisions. The disclosure must be made ina Regulation FD compliant manner.

In order to reduce duplicative Form 8-K filings in FD-compliant publicdisclosures, NASDAQ has amended certain of its rules to permit disclosure eitherthrough a press release or by filing a Form 8-K where required by SEC rules. WhereasNASDAQ previously required listed companies to disclose certain informationthrough a press release or the news media, the amendments, effective March 15, 2010,eliminated the need to file a press release in certain situations where the company isalready required to disclose the information in a filing with the SEC. Where an SECfiling is not required, however, companies must continue to make their required publicdisclosure by issuing press releases. The amended rules permit companies to satisfytheir NASDAQ public disclosure requirements by making the following disclosures byfiling a Form 8-K where required by the SEC:

• receipt of a notice that the company does not meet a listing standard or thatNASDAQ intends to delist the company and receipt of a public reprimandletter (although if the company receives a notice that it is late in filing aperiodic report with the SEC, NASDAQ rules require the company to issue apress release regarding this notice, in addition to filing any Form 8-Krequired by SEC rules);

• receipt of an exemption to the shareholder approval requirements becausecompliance would jeopardize the company’s financial viability (althoughNASDAQ still requires that companies receiving such an exemption mailthis notice to all shareholders at least 10 days before issuing securities inreliance on the exemption); and

• any change in the terms of a listed unit.

The amended rules also eliminate the requirement that a company issue a pressrelease announcing its receipt of an audit opinion expressing doubt about its ability tocontinue as a going concern. NASDAQ has determined this press release is notnecessary because the SEC already requires that this disclosure be included in acompany’s annual report, which is filed with the SEC and distributed to shareholders.

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Additionally, NASDAQ listed companies must provide NASDAQ’s MarketWatchwith at least ten minutes advance notice prior to the planned disclosure of certainmaterial news.

The advance notice requirement is intended to give NASDAQ the opportunity toconsider whether a temporary trading halt is necessary to allow for the completedissemination of the planned disclosure. Notifications to MarketWatch, whichmonitors the trading activity of NASDAQ listed companies, must be madeelectronically through its electronic submission system (available onwww.nasdaq.net). While companies are encouraged to provide advance notification toMarketWatch whenever they believe, based on the significance of the information tobe disclosed, that a temporary trading halt may be necessary, advance notification toMarketWatch is always required when disclosing material news of the followingnature:

• financial-related disclosures, including quarterly or yearly earnings, earningsrestatements, pre-announcements or guidance;

• corporate reorganizations and acquisitions, including mergers, tender offers,asset transactions and bankruptcies or receiverships;

• new products or discoveries, or developments regarding customers orsuppliers;

• senior management changes of a material nature or change in control;

• resignation or termination of independent auditors or withdrawal of apreviously issued audit report;

• events regarding the company’s securities (e.g., defaults on senior securities,calls of securities for redemption, repurchase plans, stock splits or changesin dividends, changes to the rights of security holders or public or privatesales of additional securities);

• significant legal or regulatory developments; and

• any event requiring the filing of a Form 8-K.

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Practice Tip: Pursuant to a 2010 NASDAQ rule change, NASDAQ has clarifiedthat companies listed on the NASDAQ Stock Market will be required to provideNASDAQ with prompt notification after an executive officer of the companybecomes aware of any noncompliance with NASDAQ’s corporate governancerequirements, whether or not the company believes that the noncompliance ismaterial. Thus, NASDAQ-listed companies may want to assess their internalreporting procedures to ensure that all executive officers are instructed to report tothe appropriate internal contact any non-compliance with the NASDAQ corporategovernance listing standards.

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TRADING IN ISSUER STOCK

Under Section 10(b) of the Exchange Act and Rule 10b-5, a public company andits officers, directors and other employees may not trade in company securities on thebasis of material nonpublic information. This section of the handbook provides anoverview of certain SEC safe harbor rules designed to assist issuers and their insiderswith avoiding 10b-5 liability and policies and procedures that issuers typically adopt tohelp prevent insider trading violations. In addition, this section also touches on Rule144 under the Securities Act which provides a safe harbor for company insiders andcertain other security holders seeking to sell securities in unregistered transactions.Certain other restrictions and requirements relating to purchases and sales of securitiesby company insiders are addressed in other sections of this handbook. See “Ownershipand Trading Reports by Management and Large Shareholders.” See also, “AddressingPotential Conflicts of Interests” under the section of this handbook entitled “TheSarbanes-Oxley Act” for a discussion of the prohibition on certain transactions byinsiders during pension black-out periods. Public companies and their officers,directors and other affiliates must also be mindful of engaging in other conduct thatmay constitute or be viewed as manipulative or deceptive within the meaning of thesecurities laws, including in connection with their purchases of company securities.

TRADING ON THE BASIS OF MATERIAL NONPUBLIC INFORMATION

What is Material Information?

For purposes of determining whether a person is engaging in insider trading,information is material if there is a substantial likelihood that a reasonable investorwould consider the information important in making an investment decision regardingthe purchase or sale of the issuer’s securities. The information does not have to be suchthat it would have caused a reasonable investor to make a different decision. Whetherparticular information is material will depend on the facts and circumstances; howeverthere are various categories of information that are particularly sensitive and shouldgenerally be viewed as material, subject to a further assessment of the circumstances atthe time such information becomes known. Information that may be material includes:

• earnings information;

• projections of future earnings or losses;

• variations in projections that have been made public;

• new product launches or announcements, new developments or discoveries;

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• news of a pending or proposed merger, acquisition, disposition, divestiture,joint venture or change in assets;

• impending bankruptcy or financial liquidity problems;

• gain or loss of a substantial customer or supplier;

• significant product defects or modifications;

• significant and unanticipated changes in pricing, sales, costs or expenses;

• proposed stock splits or consolidations;

• proposed new equity or debt offerings;

• significant litigation exposure due to actual or threatened litigation; and

• changes in senior management.

Insider Trading Policies and Programs

Public companies generally do and should establish insider trading complianceprograms designed to prevent insider trading. There are many factors that a publiccompany should take into consideration in designing an insider trading policy andprogram.3 These include an assessment of: (i) the size of the company; (ii) the

3 In addition to adopting policies and procedures to prevent insider trading by their officers, directorsand other employees, public companies must also consider whether they have appropriate safeguards inplace when disclosing nonpublic information to parties that may not be insiders. In a highly publicizedcase, SEC v. Cuban, Mark Cuban, a 6.5% shareholder of a public company sold his stake in the companyshortly after learning from the company’s chief executive officer and advisors to the company that thecompany would be conducting a private offering of its securities. Cuban agreed to keep confidential theinformation about the proposed offering, but argued that he did not agree not to trade on the basis of theinformation or while it remained nonpublic, and therefore, did not have the requisite duty of trust andconfidence to the company and its shareholders to support a claim for insider trading. The District Courtin Dallas, Texas agreed with Cuban, finding that he had not agreed to refrain from trading. The FifthCircuit Court of Appeals has since overruled the District Court and remanded the case for furtherconsideration of whether Cuban, in his conversations with the chief executive officer, did agree to refrainfrom trading, and therefore undertook a duty of trust and confidence that would have barred him fromtrading while in possession of the disclosed information. Notably, both the District Court and the Court ofAppeals analyzed the case on the basis that Cuban was not an insider of the company. It remains an openquestion whether a third party can trade with impunity on information provided under a confidentialityagreement that does not expressly prohibit trading. See, SEC v. Cuban, No. 09-10996, 2010 U.S. App.LEXIS 19563 (5th Cir. Sept. 21, 2010).

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potential for large volumes of trading in its securities; (iii) the number of insiders whohave access to material nonpublic information; (iv) the existence of any previousinsider trading violations; (v) the ability of officers, directors and employees to complywith the adopted policies; and (vi) whether the policies will be applied to all, most or amore limited number of employees. An effective compliance program may include thefollowing recommended elements:

• established time frames during the issuer’s corporate disclosure calendar inwhich trading by officers, directors and other employees may be appropriate(i.e., trading windows);

• restrictions on access to sensitive documents, such as limitations ondissemination of information to employees on a “need to know” basis;

• preclearance procedures administered by a designated compliance officerprior to executing a trade;

• restrictions on trading by family members in the issuer’s stock;

• procedures for issuer approval of insider 10b5-1 plans;

• educational programs that provide appropriate training and education toemployees on the law of insider trading and potential liability;

• restricting employees from making recommendations or expressing opinionsabout an issuer’s stock;

• prohibitions against certain types of transactions, such as short-term trading,short sales, margin purchases and transactions in derivative securities toavoid the appearance of speculation in the issuer’s securities; and

• designation of a compliance officer responsible for establishing, monitoringand enforcing the issuer’s compliance policies.

Trading Windows

When adopting insider trading policies, companies generally establish timeperiods in which employees and directors may be permitted to execute trades in thecompany’s securities. The adopted window periods are established by determining thetimes during the year that employees and directors are less likely to be in possession ofmaterial nonpublic information. The trading windows vary from company to company,but generally open after material information of the issuer has been publicly disclosed

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and close prior to periods of increased sensitivity to issuer information. Sensitive timeperiods include the period prior to the end of an issuer’s fiscal quarter or year where aninsider may have information concerning the issuer’s results, and therefore windowstypically close some number of weeks prior to the end of an issuer’s fiscal quarter andre-open one to three trading days after the issuer’s earnings release. An open tradingwindow does not give insiders a green light to automatically trade in the issuer’s stock,however. Even though a trading window may be open, employees and other insidersmay still possess material nonpublic information, and would still be prohibited fromtrading. Insider trading programs and policies must therefore also incorporatemechanisms to prevent employees and other insiders from trading during openwindow periods if in possession of material nonpublic information. These typicallyinclude notices and reminders to individuals who are in possession of particularinformation, imposition of “black-out” periods, and requiring pre-clearance of tradeseven during open window periods.

10b5-1 Plans and Procedures

With the adoption of Rule 10b5-1, the SEC effectively established a presumptionthat if a person is aware of material nonpublic information at the time the person tradesin securities of an issuer, then the person will be deemed to have traded “on the basisof” such information. Rule 10b5-1 established certain affirmative defenses that couldrebut this presumption.

Rule 10b5-1 permits companies and company insiders to establish trading plansallowing transactions to be effected within a “safe harbor” from 10b-5 liability eventhough executed at a later time when the company or individual possesses materialnonpublic information. For the safe harbor to be available, the company or insidermust demonstrate that before becoming aware of the material nonpublic information,the company or insider (i) entered into a binding contract to trade in the issuer’ssecurities, (ii) provided instructions to another person to execute the trades for theperson’s account, or (iii) adopted a written plan for trading the securities. In addition,the contract, instructions or plan (x) must have expressly specified the amount, priceand date for the transaction or provided a written formula or mechanism fordetermining such information, or (y) must not have permitted the person to exerciseany subsequent influence over how, when or whether to effect purchases or sales.Finally, the actual trade must have been executed pursuant to such contract, instructionor plan.

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Practice tip: A transaction is not “pursuant to” a contract, instruction or plan if theinsider alters or deviates from the contract, instruction or plan in connection withthe transaction or entered into or altered a corresponding hedging transaction.

Rule 10b5-1 plans have become a common mechanism to facilitate insiders’transactions. Generally, the insider’s broker will provide a template 10b5-1 plan whichcan be customized based on the insider’s needs. Issuers may also developrecommended 10b5-1 plan templates for their insiders. As part of its insider tradingpolicies, an issuer may wish to impose an approval requirement to determine whetheran employee’s or director’s 10b5-1 plan meets the requirements of Rule 10b5-1. Keyprocedures issuers should implement within their compliance policies to monitor theirinsiders’ 10b5-1 plans are:

• Plan approval. The general counsel or compliance officer of the issuershould review the insider’s proposed 10b5-1 plan prior to execution.

• Timing of adoption. Plans should not be entered into at a time when theinsider is aware of material nonpublic information. This is true even if theplan is structured so that plan transactions will not begin until after thematerial nonpublic information is made public.

• Cooling-off period. The time between the establishment of a plan andcommencement of trades should be at least 30 days.

• Trading windows. Insiders should not be permitted to enter into 10b5-1plans outside of ordinary open trading windows.

• One insider, one plan. Limitations on the ability of insiders to enter intomultiple, overlapping 10b5-1 plans should be implemented.

• Disclosure. Issuers should consider disclosing the adoption of 10b5-1plans by their Section 16 insiders. There is no need to provide the details ofthe plan. Required Form 4 filings of Section 16 insiders for sales made underRule 10b5-1 plans should specifically note that the sales were made underthe 10b5-1 plan.

• Cancellation of transactions. Insiders should not have the ability tooverride plan transactions.

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• Modifications and Terminations. Modifications and terminations to a planshould not be permitted other than during open trading windows. Frequentchanges to the plan could affect its validity.

• Execution broker. A broker for insiders to use in executing trades shouldbe specified or insiders should be required to obtain issuer approval of thebroker they intend to use.

• Documentation. Insiders should be required to provide the issuer with thedate on which they adopted their 10b5-1 plans for purposes of confirmingthat they were not in possession of material nonpublic information at suchtime.

Rule 10b5-1 establishes a further affirmative defense for corporate defendants ininsider trading cases. The defense is available if the defendant can demonstrate that(i) individuals making trading decisions on its behalf were not in fact aware of materialnonpublic information; and (ii) the defendant implemented reasonable policies andprocedures to ensure that individuals making investment decisions would not violateinsider trading laws. The policies and procedures may seek to restrict purchases orsales while individuals are in possession of material nonpublic information, or toprevent the individuals from becoming aware of material nonpublic information. Thisdefense is not available to defendants who are individuals.

RESALES OF RESTRICTED AND CONTROL SECURITIES

Rule 144

Generally, any security holder seeking to sell securities must either register the saleunder the Securities Act or qualify for an exemption from registration. Section 4(1) ofthe Securities Act provides an exemption for ordinary trading of securities by personsthat are not issuers, underwriters or dealers. However, the expansive definition of theterm “underwriter” creates the risk that an issuer’s affiliates and other security holderswill be treated as “statutory underwriters,” and therefore will be unable to utilize thisexemption. Rule 144 under the Securities Act provides a “safe harbor” under Section4(1) that, provided all the applicable conditions to the Rule are satisfied, allows for thepublic resale of securities without registration under the Securities Act. The Rule 144safe harbor protects sales of “restricted securities,” which generally are securities thathave been acquired in an unregistered sale from the issuer or from an affiliate of theissuer (e.g., securities acquired from the issuer in a private placement). Rule 144 alsoprotects sales of “control securities,” which are any securities of an issuer held by its

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affiliates, including its executive officers and directors. Even if securities are acquired ina registered sale or in the open market, they are considered “control securities” once heldby an affiliate. An affiliate also must deal with the concern that its ability to sellsecurities may be negatively impacted as a consequence of the Rule 144 definition of“restricted securities” under which a person that purchases control securities from theaffiliate in a transaction that is not registered under the Securities Act acquires restrictedsecurities, even if the securities were not restricted in the affiliate’s hands.

To address the risks described above, executive officers, directors and otheraffiliates of public companies typically rely on the Rule 144 safe harbor to resell theirsecurities to the public. Securities sold by an affiliate in compliance with Rule 144 willnot be restricted securities in the hands of the purchaser. To qualify for the Rule 144safe harbor, a resale transaction by an affiliate must satisfy the following conditions:

• Availability of Current Public Information. At the time of the resaletransaction, adequate current public information about the issuer must beavailable. This requirement is met if during the 12 months preceding the saleor such shorter period as the issuer has been a reporting company, the issuerhas filed all required Exchange Act reports (other than current reports onForm 8-K) and submitted electronically and posted on its website, if any, allrequired XBRL files.

• Holding Period. If an affiliate of a public company holds “restrictedsecurities,” those securities must be held for no less than six months from thedate they were acquired before they can be resold. The holding period beginson the date the securities were purchased and fully paid for. Note that anyunrestricted securities of an issuer that are held by an affiliate, includingthose acquired by the affiliate in the marketplace or in a registered offering(including securities registered under a Form S-8 that were issued pursuantto an equity compensation plan), would not be subject to the holding periodrequirement, although they are still control securities that could only beresold under Rule 144 if the other applicable conditions have been satisfied.

• Sales Volume. The amount of securities to be sold by an affiliate, togetherwith all securities of the same class sold during the preceding three-monthperiod, may not exceed the greater of (i) 1% of the total number of sharesoutstanding of the class being sold, or (ii) the average weekly trading volumeof the class of shares during the four full calendar weeks preceding the

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transaction. For debt securities, the volume of sales during any three-monthperiod may not exceed 10% of the class of debt securities outstanding.

• Manner of Sale Requirements. Generally, control securities may only besold in routine trading transactions where the broker receives no more than anormal commission and where neither the affiliate seller nor the broker hassolicited orders to buy the securities. These requirements do not apply to anaffiliate’s sale of debt securities.

• Form 144 Filing. When placing an order to sell with a broker, affiliatesmust file a notice on Form 144 unless the sale, when combined with all othersales by the affiliate within a three month period, involves less than 5,000shares and the aggregate dollar amount of such sales do not exceed $50,000.Although the filing of a Form 144 does not obligate the filer to sell anyshares, if the shares listed on the Form 144 are not sold within three monthsof the filing, an amended Form 144 must be filed. A Form 144 may be filedwith the SEC in paper form or, at the affiliate’s option, electronically usingthe SEC’s EDGAR filing system.

Rule 144 may also be relied on by non-affiliates selling restricted securities ofpublic company issuers. Only the current public information and holding periodconditions apply to these sales; however, after one year following a non-affiliate’sacquisition of restricted securities from the issuer or an affiliate of the issuer, thenon-affiliate may sell the securities without regard to any of the Rule 144 conditions,including the current public information condition. A person seeking to rely on theRule 144 exemption as a non-affiliate cannot be an affiliate at the time of the Rule 144sale and cannot have been an affiliate during the three months preceding the sale. TheSEC has amended Rule 144 to clarify that the Rule is also available for resales ofsecurities of issuers that are not public companies (or have been subject to theExchange Act’s reporting requirements for fewer than 90 days). These transactions aresubject to a one year holding period requirement and somewhat less stringentconditions than for public company securities.

Restricted securities that are sold in compliance with Rule 144 cease to berestricted upon such sale.

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Sales of Restricted Shares Outside of Rule 144

Rule 144 is not the exclusive method for security holders to resell securitieswithout registration under the Securities Act. Even if the Rule 144 safe harbor isunavailable, the Section 4(1) exemption may be relied upon for sales by persons otherthan issuers, underwriters and dealers. However, the Section 4(1) exemption has beeninterpreted as generally permitting only ordinary trading activity, such as thatconducted in open market. As a result, Section 4(1) would be unavailable for privatesales involving control or restricted securities. While Section 4(2) of the Securities Actexempts from registration “transactions by an issuer not involving a public offering,”on its face, the Section 4(2) exemption is only available to issuers conducting a privatesale and does not exempt private sales by any person other than an issuer. In theabsence of an express statutory exemption, private sales of restricted or controlsecurities by persons other than an issuer are often structured using a hybrid of theSection 4(1) and Section 4(2) exemptions referred to as a “Section 4(1-1/2)exemption.” While the Section 4(1-1/2) exemption is not statutory nor has it beenformally adopted by the SEC, the SEC has long recognized its use for exemptingprivate sales where certain conditions for sales under both Section 4(1) andSection 4(2) have been satisfied. Generally, sales that are made in reliance on theSection 4(1-1/2) exemption should be subject to restrictions on general solicitation andadvertising and be made to a limited number of qualified purchasers who have beenprovided with (or have access to) the information necessary to make an investmentdecision and who agree to be bound by a holding period and/or transfer restrictions.

Generally, restricted securities sold other than in compliance with Rule 144continue to be restricted after the sale. If the sale is by an affiliate, a new holdingperiod will commence for purposes of further resales under Rule 144. If the sale is bya non-affiliate, the purchaser may tack the seller’s holding period rather than start anew one.

ISSUER STOCK REPURCHASES

Stock purchases by an issuer and its affiliates are subject to the anti-manipulationprovisions of Sections 9(a)(2) and 10(b) of the Exchange Act and Rule10b-5 under theExchange Act, which make it illegal to (i) manipulate the price of a security registeredon a national securities exchange by creating actual or apparent trading in suchsecurity or by raising or depressing the price of such security in order to induce othersto buy or sell the security, and (ii) use any manipulative or deceptive device orotherwise engage in fraud in connection with the purchase or sale of any security.

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Rule 10b-18

Rule 10b-18 under the Exchange Act provides issuers with a safe harbor fromliability for violations of Sections 9(a)(2) and 10(b) and Rule 10b-5 when the issuerpurchases its securities in open market transactions. An issuer taking advantage ofRule 10b-18 will be protected from claims that the manner, timing, price or volume ofits purchases violate Section 9(a)(2) or 10(b). Note, however, that Rule 10b-18 is not asafe harbor from liability for trades on the basis of material nonpublic information.Rule 10b-18 is available to issuers, as well as their affiliates. Likewise, purchases byissuers and their affiliates are aggregated for purposes of Rule 10b-18.

To avail itself of the safe harbor protections of Rule 10b-18, an issuer and itsaffiliated purchasers must satisfy the following four conditions:

• Manner of Repurchase. When soliciting purchases, the issuer must use asingle broker or dealer per day to bid for or purchase the issuer’s stock.After-hour purchases that comply with the manner, price and volumelimitations of Rule 10b-18 may be effected through a different broker ordealer.

• Timing. The issuer’s purchase cannot be the opening transaction in theissuer’s security that is reported in the consolidated system on any tradingday. Additionally, the issuer’s purchase cannot be made during the last 30minutes before scheduled closing of the principal market on which thesecurities trade or of the market on which the trade is effected, except that if(i) the average daily trading volume for the security for the previous four fullcalendar weeks (ADTV) is $1 million or more and (ii) the security has apublic float of $150 million or more, the issuer may execute stockrepurchases up to 10 minutes prior to the scheduled close of trading.

• Price. Generally, the highest price the issuer may pay cannot exceed thehighest independent bid or the last independent transaction price, whicheveris higher, at the time of the transaction. The determination of the applicableindependent bids and prices depends on whether transactions in the securityare reported in the consolidated system or disseminated or displayed on anational securities exchange or inter-dealer quotation system or not reportedin either manner. The price condition is intended to prevent the issuer fromleading the market through its repurchases by limiting the issuer’s purchaseprices to prices based on independent reference prices.

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• Trading Volume Limitation. The aggregate amount of stock that may berepurchased by the issuer and its affiliated purchasers on any single day may notexceed 25% of the ADTV). Issuers may, however, execute one block purchaseper week in lieu of making purchases in accordance with the 25% tradingvolume limitation on that day. The block purchase may not be included whencalculating the security’s ADTV for purposes of the safe harbor.

Issuers seeking to rely on the Rule 10b-18 safe harbor should incorporate proceduresto keep track of the purchases made by their affiliates in order to make the requiredcalculations under Rule 10b-18.

The failure to meet any of the foregoing conditions for a particular transactionwill result in the loss of the Rule 10b-18 safe harbor for all transactions by the issuerand its affiliates for that trading day. Failure to satisfy the safe harbor requirementsdoes not mean, however, that the purchases were manipulative; rather, it means thatsuch purchases must be analyzed on a facts and circumstances basis.

The Rule 10b-18 safe harbor is not available for certain transactions, includingpurchases occurring during a specified period after the issuer has announced a mergertransaction or as part of an issuer tender offer or a third party tender offer forregistered securities.

In January 2010, the SEC proposed and published for comments amendmentsintended to clarify and modernize the safe harbor provisions of Rule 10b-18. Asproposed, the amendments would:

• modify the timing condition to preclude Rule 10b-18 purchases as theopening purchase in the principal market for the security and in the marketwhere the purchase is effected (in addition to the current prohibition againsteffecting Rule 10b-18 purchases as the opening purchase reported in theconsolidated system);

• relax the price condition to permit issuers flexibility to make purchases atvolume weighted average prices (VWAP) and at blended prices establishedthrough electronic trading systems, instead of the strict restriction based onthe highest independent bid or price for the security;

• enable issuers to claim the protection of the safe harbor for complyingtransactions under certain circumstances when all of their transactions on

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that day do not strictly comply with the safe harbor conditions due to“flickering quotes;” and

• extend the time during which the safe harbor is not available in connectionwith an acquisition by a special purpose acquisition company.

Key Considerations Prior to Initiating Stock Repurchase Programs

Prior to initiating or amending a stock repurchase program, issuers shouldcarefully consider additional laws and rules relevant to their and their affiliates’purchases of their securities, including:

• insider trading prohibitions;

• SEC disclosure requirements applicable to the issuer;

• applicable stock exchange notification and reporting requirements;

• Regulation M under the Exchange Act, which prohibits an issuer or affiliatedpurchaser from purchasing the issuer’s securities which are subject to“distribution” during a defined restricted period; and

• tender offer rules.

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OWNERSHIP AND TRADING REPORTS BYMANAGEMENT AND LARGE SHAREHOLDERS

Beneficial owners of greater than 5% of a class of a public company’s registeredequity securities are subject to ownership reporting obligations under eitherSection 13(d) or Section 13(g) of the Exchange Act. These reporting obligations wereadopted to alert a public company and the marketplace in general to large, rapidaccumulations of registered equity securities which could represent a potential changein corporate control. At the same time, a public company’s directors, executiveofficers and greater than 10% beneficial shareholders are subject to certain ownershipreporting obligations and trading restrictions under Section 16 of the Exchange Act.Section 16 is designed to deter corporate insiders from trading on material, nonpublicinformation for their personal gain. Under Section 16, insiders are required to publiclyreport their ownership of and transactions involving the company’s equity securities.In addition, insiders are subject to strict liability for profits realized from short-swingtrades in the company’s equity securities and are prohibited from selling thosesecurities short. We address the different reporting and trading requirements ofSections 13(d) and (g) and Section 16 of the Exchange Act below.

SECTIONS 13(d) AND (g) OF THE EXCHANGE ACT

Under Section 13(d) of the Exchange Act, any person who acquires beneficialownership of greater than 5% of any class of a company’s voting equity securitiesregistered under Section 12 of the Exchange Act is required to file a report with theSEC on Schedule 13D or, if eligible, on short-form Schedule 13G. In addition,Section 13(g) of the Exchange Act requires a person to file a Schedule 13G with theSEC if that person beneficially owns greater than 5% of a class of a company’sregistered voting equity securities as of the end of the calendar year but has not madean acquisition subject to Section 13(d). Generally, shares that are publicly traded inU.S. markets are registered under Section 12, including shares underlying a foreigncompany’s American Depositary Receipts (ADRs). In this section we refer to a classof a company’s voting equity securities registered under Section 12 of the ExchangeAct as reportable securities.

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Beneficial Ownership. For purposes of Sections13(d) and (g), a person is deemed to havebeneficial ownership of any reportable securitiesover which such person has or shares votingpower or investment power, whether directly orindirectly, through any contract, arrangement,understanding, relationship or otherwise. Votingpower includes the power to vote or direct thevoting of the shares, while investment powerincludes the power to dispose of or direct thedisposition of the shares. Parties who share votingor investment power over a company’s reportablesecurities are each deemed to beneficially ownthose reportable securities.

A person also is deemed to beneficially own reportable securities that the person hasthe right to acquire within 60 days. Therefore, if a person enters into a contingent agreementwhich gives that person the right to acquire reportable securities within 60 days, or ownsoptions or convertible securities that can be exercised for or converted into reportablesecurities within 60 days, the person is deemed to beneficially own those reportablesecurities for purposes of Sections 13(d) and (g) once all material contingencies over whichthe person has no control have been waived or satisfied. Reportable securities that a personmay acquire within 60 days are added to the total number of outstanding reportablesecurities when calculating such person’s percentage ownership.

Practice Tip: A person who owns convertible securities that are convertible intogreater than 5% of a company’s reportable securities within 60 days may not beobligated to file a beneficial ownership report if the conversion rights restrict theperson from beneficially owning more than 5% of the company’s reportablesecurities at any one time. To effectively prevent a person from becoming a greaterthan 5% beneficial owner and incurring a reporting obligation under Section 13(d)or (g), the conversion cap must be valid and binding. Factors indicating that aconversion cap is valid and binding include whether it is provided in the company’scertificate of designation or governing instruments, reflects limitations establishedby another regulatory scheme applicable to the company, or is the product of bonafide negotiations between the parties. In contrast, a conversion cap may bedisregarded as illusory if it may be waived by the company or the security holder,lacks an enforcement mechanism, has not been adhered to in practice, or can beavoided by transferring the securities to an affiliate of the holder.

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Practice Tip: ADRs are notconsidered a separate class fromtheir underlying shares forpurposes of the reportingobligations of Sections 13(d)and (g). These reportingobligations apply to acquisitionsof ADRs if the underlyingshares are registered underSection 12 of the Exchange Actand represent, in the aggregate,more than 5% of all outstandingshares of the same class.


Recent Development: Section 766 of the Dodd-Frank Act provides that a person whopurchases or sells a “security-based swap” (SBS) will not be deemed to acquirebeneficial ownership of an equity security under Section 13 of the Exchange Act unlessthe SEC, by rule, determines that the purchase or sale of the SBS or class of SBSprovides incidents of ownership comparable to direct ownership of the equity security,and that it is necessary to achieve the purposes of Section 13 to treat the purchase orsale of the SBS or class of SBS as the acquisition of beneficial ownership of the equitysecurity. An SBS is broadly defined as a swap based on (i) a single security or loan, (ii)a narrow-based index of securities or (iii) events relating to a single issuer or issuers ofsecurities in a narrow-based security index. As this handbook goes to publication, theSEC has not issued rules providing for the purchase or sale of an SBS to be deemed theacquisition of beneficial ownership of an equity security. The SEC has, however,issued proposed Regulation SBSR, which would provide for the reporting of SBSinformation to registered SBS data repositories or the SEC and the publicdissemination of SBS transaction, volume, and pricing information.

Section 13(d) or (g) Group. Whentwo or more persons agree to act togetherfor the purpose of acquiring, holding,voting or disposing of reportable securities,they are characterized as a “group” underRule 13d-5, and the holdings of the groupare then aggregated to determine whetherthe 5% reporting threshold has beenexceeded. Each member of the group isdeemed to share beneficial ownership ofall securities owned by the group. A personwho does not beneficially own anyreportable securities, however, cannotbecome a member of a group for purposesof Section 13(d) or (g), even if the personagrees to act together with members of thegroup for the purpose of acquiring,holding, voting or disposing of acompany’s reportable securities.

Practice Tip: Courts are likely to viewcertain activities by two or more personsas indicating the formation of a group forpurposes of Section 13(d) or(g) reporting. These include concertedactions to facilitate or defeat a takeoverattempt, efforts to influence decisions bya company’s board of directors, coordi-nated trading activities that appear tofurther a common objective, and closecollaboration or cooperation with respectto a company’s management or secu-rities. For example, purchasers in a roundof private financing could be deemed agroup for Section 13(d) or (g) reportingpurposes if they share a representative ona company’s board of directors or havean agreement to vote their shares in favorof the company’s director nominees.

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Recent Development: The SEC staff recently issued a no-action letter clarifyingthat certain stockholder arrangements will not result in the creation of a group forpurposes of Section 13(d) or (g). In particular, the SEC staff indicated that amajority stockholder’s unilateral offer to individual stockholders of pro ratatag-along rights in return for an irrevocable proxy to vote such stockholders’ shareswith respect to certain corporate matters did not create an agreement to act togetherfor the purpose of acquiring, holding, voting or disposing of reportable securities.Under the facts of the no-action letter, the majority stockholder would enter intoseparate tag-along and proxy agreements with each individual stockholder thataccepted its offer, and would report any shares with respect to which it is grantedan irrevocable proxy as indirectly beneficially owned by it for Section 13(d) or(g) reporting purposes. Because the individual stockholders would have divestedthemselves of voting power, and would make a separate determination of whetherto sell in the tag-along offering, they would not be acting together with the majoritystockholder. In addition, the letter confirmed that individual agreements between astockholder and the issuer regarding such matters as transfer restrictions,repurchase rights, and piggyback registration rights would not create a group, as anissuer cannot be a group member. The letter also indicates, however, that drag-along rights and mutual voting agreements may result in creation of a group.

Parent/Subsidiary DisclosureObligations. When a subsidiary in a multi-tiered organizational structure acquiresgreater than 5% of a company’s reportable securities, each entity above the subsidiaryin the organizational chain is typically attributed beneficial ownership of the securitiesheld by the subsidiary and joins in its Schedule 13D or 13G filing. All relevant factsand circumstances are considered when determining whether attribution of beneficialownership is warranted.

A Schedule 13D (but not a Schedule 13G) filed by a subsidiary typically mustinclude background information for each executive officer and director of thesubsidiary, as well as the executive officers and directors of the subsidiary’s ultimateparent entity and each other entity that directly or indirectly controls the subsidiary.Background information also would be required for any controlling shareholder of thesubsidiary’s parent. Generally, a shareholder who owns 10% or more of theoutstanding voting securities of an entity is presumed to control that entity, althoughthat presumption is rebuttable based on facts and circumstances.

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All forms of beneficial ownership are aggregated when determining whether the5% ownership threshold has been exceeded. Accordingly, when calculating beneficialownership, a person must include all reportable securities over which the person hasdirect or indirect voting or investment power, including securities the person canacquire within 60 days and, if applicable, all securities owned by other groupmembers.

Practice Tip: A person’s obligation to file a beneficial ownership report underSections 13(d) or (g) may be triggered by an involuntary change in circumstances,such as company repurchases which reduce the number of its outstandingreportable securities. Where a person becomes the beneficial owner of more than5% of a company’s reportable securities due to an involuntary change incircumstances rather than an acquisition of securities, the person may report itsownership on short-form Schedule 13G pursuant to Rule 13d-1(d). In contrast, aperson who influenced or controlled the change in the aggregate number ofoutstanding securities which resulted in their beneficial ownership exceeding 5%,such as an officer or director of the company, must report its ownership onSchedule 13D.

Schedule 13D

Schedule 13D disclosures are designed to function as an early warning system toalert a public company and its investors to the potential control intentions of personsmaking significant acquisitions of the company’s shares. A Schedule 13D must befiled electronically with the SEC via EDGAR within 10 days of an acquisition whichbrings a person’s beneficial ownership of reportable securities above the 5%threshold.

Recent Development: Section 929R of the Dodd-Frank Act amended Section13(d) of the Exchange Act to authorize the SEC to establish by rule a shorter timeperiod within which a Schedule 13D must be filed. As this handbook goes topublication, the SEC has not proposed any rule change that would shorten thecurrent 10-day reporting window.

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Practice Tip: The Schedule 13D must be filed within 10 days of the trade date ofthe transaction that creates the reporting obligation. Although under contract law aperson may not receive legal ownership of reportable securities until the date thetransaction is settled, at a minimum the person may exercise investment power overthe acquired securities as of the trade date. The first calendar day after the tradedate is considered day number one for purposes of calculating the applicable10-day period.

Schedule 13D requires the disclosure of certain background information about thereporting person and the source of funds used to acquire the company’s reportablesecurities. In addition, the reporting person is required to disclose the purpose for whichthe reportable securities were acquired in order to notify investors and the companywhether the person intends to change or influence the company’s management andpolicies. Generally, the information required to be disclosed consists of the following:

• the beneficial owner’s identity, residence, and citizenship, as well as certainadditional background information;

• the number of reportable securities owned, and any rights to acquirereportable securities either by the person filing the statement or by eachassociate of such person;

• the source and amount of the funds used to make the purchase; in particular,disclosure of funds that were borrowed in order to acquire the reportablesecurities;

• the purpose of the acquisition and plans or proposals to, among other things,acquire control of the company, change its present board of directors, sell itsassets, initiate a merger, liquidate the company, or make major changes to itsbusiness; and

• information regarding any contracts, arrangements, or understandings enteredinto with respect to the company’s securities.

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Practice Tip: The SEC has cautioned that a plan or proposal, as those terms areused in Schedule 13D, may be deemed to exist prior to the execution of a formalagreement or commencement of a particular transaction. Accordingly, a reportingperson who has included generic disclosure in its Schedule 13D reserving its rightto acquire additional reportable securities, seek a change of management, or engagein any action enumerated in Item 4 of Schedule 13D may need to amend thatdisclosure when the reporting person has formulated a specific intention withrespect to the action in question.

An amendment must be filed “promptly” upon the occurrence of any materialchange in the information set forth in a Schedule 13D, including a material increase ordecrease in the number of reportable securities beneficially owned by the reportingperson. An acquisition or disposition of 1% or more of the outstanding shares of theregistered class is deemed material for purposes of the rule. Changes of less than 1%could also be considered material depending on the circumstances. Although the term“promptly” is not defined, amendments should generally be filed within one or twobusiness days, as any delay beyond the date the amendment reasonably can be filedmay not be considered prompt.

Schedule 13G

A person who would otherwise be required to file a Schedule 13D may file ashort-form Schedule 13G if the person is a “Qualified Institutional Investor,” “PassiveInvestor,” or an “Exempt Investor.” The Schedule 13G must be filed electronicallywith the SEC via EDGAR. The requirements pertaining to each category of personseligible to file on Schedule 13G are discussed below.

Qualified Institutional Investor. This category includes institutional investorsspecified in Rule 13d-1(b), such as U.S.-regulated banks, U.S.-registered broker-dealers,and investment advisers registered under applicable state or federal law. A foreigninstitution that is functionally equivalent to any of the qualifying U.S. institutions mayreport on Schedule 13G as a Qualified Institutional Investor if it certifies that it is subjectto a regulatory scheme that is substantially comparable to the one applied to its U.S.counterparts and undertakes to furnish to the SEC staff, upon request, information thatwould otherwise be disclosed in a Schedule 13D. To be eligible to file on Schedule 13Gpursuant to Rule 13d-1(b), a Qualified Institutional Investor must certify that it acquired

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the reportable securities in the ordinary course of its business and not with the purpose oreffect of changing or influencing the control of the company.

Practice Tip: A Qualified Institutional Investor may certify that it has acquiredreportable securities in the ordinary course of its business only where the acquisitionis for passive investment or ordinary market-making purposes. A QualifiedInstitutional Investor may not, however, make such a certification if it acquiresreportable securities or interests in reportable securities with the purpose ofinfluencing the management or direction of a company or the outcome of a particulartransaction – such as acquiring securities in order to vote them in favor of a merger orother business combination transaction. This is true even if the investor routinelyacquires securities for those purposes as part of its business or investment strategy.

A Qualified Institutional Investor that elects to use Schedule 13G generally mustfile within 45 days after the end of the calendar year in which it beneficially owns inexcess of 5% of a company’s reportable securities as of the end of that year. AQualified Institutional Investor mustamend its Schedule 13G within 10 daysafter the end of any month in which itsbeneficial ownership, computed as of thelast day of the month, increases ordecreases by more than 5%. A QualifiedInstitutional Investor also must file anamended Schedule 13G within 45 daysafter the end of the calendar year if thereare any changes in the informationpreviously reported.

A Qualified Institutional Investorwill lose its Schedule 13G eligibility onany date that it ceases to:

• meet the institutional eligibility criteria of Rule 13d-1(b);

• hold the securities in the ordinary course of business; or

• hold the securities as a passive investment.

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Practice Tip: A Qualified InstitutionalInvestor will not lose its Schedule 13Geligibility as a result of its beneficialownership exceeding 20%, so long as itcan certify that it holds the securities inthe ordinary course of business and withthe requisite passive investment intent.Nevertheless, a Qualified InstitutionalInvestor that beneficially owns morethan 20% may have difficulty makingthe required certifications in light of itssizeable holdings.


A Qualified Institutional Investor that loses its Schedule 13G eligibility must filea Schedule 13D within 10 days of the date on which it loses its eligibility. If the loss ofeligibility is due to a change from passive investment to a control purpose or effect, theinvestor is subject to a “cooling-off” period during which it may not vote or direct thevoting of the reportable securities or acquire beneficial ownership of any additionalequity securities of the company or an entity controlling the company. The “cooling-off” period begins on the date on which the investor changes its investment intent andlasts until the expiration of the 10th day after the date on which it files itsSchedule 13D. A Qualified Institutional Investor that loses its Schedule 13G eligibilitymay resume filing on Schedule 13G once it re-establishes its eligibility.

Practice Tip: Only a person who was initially eligible to report its beneficialownership on a Schedule 13G and was later required to file a Schedule 13D mayswitch to reporting on a Schedule 13G. In such a case, the filing of the Schedule13G will be deemed to amend the Schedule 13D, and no formal Schedule 13Damendment will be required. In the event that a person is not initially eligible to filea Schedule 13G and consequently files a Schedule 13D to report its holdings, thensubsequently falls below the 5% threshold and files an amendment to the Schedule13D to report this fact, it may thereafter qualify to file a Schedule 13G if itsbeneficial ownership of the reportable securities again rises above the 5% threshold(provided that it otherwise meets the eligibility criteria for use of Schedule 13G atsuch time).

Passive Investor. Any person who beneficially owns more than 5% (but lessthan 20%) of a company’s reportable securities that were not acquired and are not heldwith the purpose or effect of changing or influencing the control of the company iseligible to file on Schedule 13G as a Passive Investor under Rule 13d-1(c).

Practice Tip: Officers or directors who beneficially own more than 5% of a classof their company’s reportable securities are generally ineligible to file a Schedule13G as a Passive Investor. The SEC has taken the position that regardless of anyspecific control intent, the ability of officers and directors to directly or indirectlyinfluence a company’s management and policies will generally render them unableto certify that the securities are not held with a control purpose or effect.

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A Passive Investor that chooses to file a Schedule 13G must do so within 10 daysof acquiring more than 5% of a company’s reportable securities. The filing must beamended promptly when the investor acquires greater than 10% of the securities andthereafter promptly whenever beneficial ownership increases or decreases by morethan 5%. As is the case for Qualified Institutional Investors, a Passive Investor mustamend its Schedule 13G within 45 days after the end of the calendar year if there areany changes in the information previously reported.

A Passive Investor will lose its Schedule 13G eligibility on the date that it:

• acquires 20% or more of the company’s reportable securities; or

• ceases to hold the securities as a passive investment.

Although the 20% threshold for loss of Schedule 13G eligibility creates nopresumption as to whether an investor has a control purpose or effect, the SEC hasnoted that it would be unusual for an investor to be able to certify that it is a PassiveInvestor when its beneficial ownership approaches 20%. A Passive Investor that losesits Schedule 13G filing eligibility must file a Schedule 13D within 10 days of the dateon which it loses its eligibility and will be subject to a “cooling-off” period until theexpiration of the 10th day following its Schedule 13D filing. Like a QualifiedInstitutional Investor, a Passive Investor that loses its Schedule 13G filing eligibilitymay resume filing a Schedule 13G once it re-establishes its eligibility.

Practice Tip: Because a Passive Investor’s Schedule 13G eligibility is conditionedon its beneficial ownership of reportable securities not exceeding 20% of the class,a Passive Investor that becomes a member of a group with aggregate beneficialownership in excess of 20% will lose its Schedule 13G eligibility, regardless ofwhether the Passive Investor or the group as a whole seeks to maintain a passiveinvestment. In that case, the Passive Investor must file a Schedule 13D with theSEC within 10 days of becoming a group member.

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Recent Development: A Qualified Institutional Investor or Passive Investor willnot lose its Schedule 13G eligibility solely as a result of engaging in activities inconnection with a director nomination under Rule 14a-11, which givesshareholders the right, under certain circumstances, to include a nominee ornominees for director in a public company’s proxy materials. However, othercontrol-related activities outside of a Rule 14a-11 nomination may result in loss ofSchedule 13G eligibility. These include approaching a company’s board and urgingthem to consider strategic alternatives, or submitting a nomination pursuant to anapplicable state or foreign law provision or a company’s governing documents. Formore information on Rule 14a-11, see “Proxy Statement and Annual ReportDisclosures and Process – Recent Development – Final Proxy Access Rule.”

Exempt Investor. A person who beneficially owns more than 5% of a company’sreportable securities at the end of a calendar year but who has not made an acquisitionsubject to Section 13(d) is considered an Exempt Investor and is subject to reportingobligations under Section 13(g) and Rule 13d-1(d). Examples include investors whoacquired their securities in a public company before the class of securities was registeredin an IPO, as well as investors who acquired not more than 2% of a company’sreportable securities within the preceding 12-month period. There are no restrictions onan Exempt Investor’s investment intent or beneficial ownership percentage.

Exempt Investors must file their initial Schedule 13G within 45 days of the end of thecalendar year in which they become subject to reporting obligations under Section 13(g)and Rule 13d-1(d). For instance, a pre-IPO investor who holds more than 5% of a class ofa company’s securities must file its Schedule 13G within 45 days after the end of thecalendar year in which the class was registered under Section 12 of the Exchange Act. AnExempt Investor is required to amend its Schedule 13G filing within 45 days of the end ofa calendar year to report any change in the information previously reported.

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Practice Tip: An Exempt Investor will not lose its Schedule 13G eligibility simplybecause it holds reportable securities with the purpose or effect of changing orinfluencing control of the company. But it will lose its Schedule 13G eligibility if itjoins with other investors to acquire, hold, vote or dispose of reportable securitieswith the purpose or effect of changing or influencing control of the company and theinvestors it joins hold in the aggregate more than 2% of the company’s reportablesecurities. By joining the group, the Exempt Investor will be deemed to haveacquired more than 2% of the company’s reportable securities and will be required tofile a Schedule 13D with the SEC within 10 days of becoming a group member.

Violations of Sections 13(d) or (g)

Penalties for failing to file a required Schedule 13D or 13G, or for filing aSchedule 13D or 13G containing false or misleading information, including as a resultof the omission of required information, may include:

• imposition of a civil monetary penalty;

• an injunction to prevent further purchases pending corrective disclosure;

• a “cooling-off period” to allow adequate time for dissemination to andconsideration of the information by the public; or

• an injunction preventing a group of bidders from voting its “tainted” sharesother than in proportion to the votes cast by shares that were not “tainted.”

Companies being targeted by an activist investor may wish to consider scrutinizingthe investor’s filings on Schedule 13D or 13G (or lack thereof) for possibleSection 13(d) violations. Although Sections 13(d) and (g) do not provide an expressprivate right of action to enforce violations of their reporting provisions, a number ofcourts have implied that such a right exists for purposes of seeking injunctive or otherequitable relief. Accordingly, at least one federal appeals court has held that a companymay sue for injunctive relief to remedy false or misleading Section 13(d) disclosures.16

Furthermore, another federal appeals court has ruled that companies as well as membersof company management have a private right of action to seek injunctive relief forSection 13(d) violations.17 However, these decisions must be considered in light of

16 GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971).17 Ind. Nat’l Corp. v. Rich, 712 F.2d 1180 (7th Cir. 1983).

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others which have held that Section 13(d) does not allow a company or its shareholdersto a bring a private right of action for injunctive or other equitable relief.18

SECTION 16 OF THE EXCHANGE ACT

The general purpose of Section 16 of the Exchange Act is to deter corporateinsiders – officers, directors and holders of greater than 10% of any class of a publiccompany’s equity securities – from trading in their companies’ equity securities on thebasis of nonpublic information. To achieve these ends, Section 16 takes athree-pronged approach. First, Section 16(a) requires insiders to publicly discloseholdings of and transactions in the company’s equity securities. Second, Section 16(b)renders insiders liable to the company for the amount of any “short-swing” profitsgarnered in transactions involving the company’s equity securities. Finally,Section 16(c) prohibits insiders from engaging in short sales of the company’s equitysecurities.

There are three types of corporate insiders for purposes of Section 16: officers,directors, and greater than 10% shareholders. We refer to these three types ofcorporate insiders collectively as Section 16 insiders.

The company officers subject to Section 16 are:

• the president;

• the principal financial officer;

• the principal accounting officer (or, if there is no such accounting officer, thecontroller);

• any vice president in charge of a principal business unit, division or function(such as sales, administration or finance);

• any other officer who performs a significant policy-making function; and

• any other person who performs similar policy-making functions for thecompany.

18 Leff v. CIP Corp., 540 F. Supp. 857 (S.D. Ohio, 1982); Liberty National Insurance Holding Co. v.Charter Co., 734 F.2d 545, 555-59 (11th Cir. 1984).

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Officers of a company’s parents orsubsidiaries are deemed to be “officers” of thecompany for purposes of Section 16 if theyperform policy-making functions for the company.Additionally, there is a presumption that thepersons whom the company has identified as“executive officers” in the company’s proxystatement or on its annual report on Form 10-K arealso covered officers for purposes of Section 16.

For purposes of Section 16, a “director” includes any director of a company orany person performing similar functions with respect to any organization. Thisdefinition should be broadly understood to encompass any person who performs thefunctions of a director, irrespective of the person’s formal title. In addition, any personor entity that deputizes another to serve as its representative on a company’s board ofdirectors is also considered a “director” for purposes of Section 16.

A greater than 10% shareholder subject to Section 16 is any person whobeneficially owns, directly or indirectly, more than 10% of any class of the company’sequity securities registered under Section 12.

One frequent source of confusion is that beneficial ownership essentially has twomeanings under Section 16. For purposes of determining whether a person is a greaterthan 10% shareholder subject to the reporting requirements of Section 16(a), a personis generally deemed to beneficially own any security over which the person has orshares voting or investment power. This is the same definition of beneficial ownershipthat is applicable under Section 13(d). As explained above, under this definition aperson will generally be deemed to beneficially own a security if that person has orshares the power to: (i) vote, or direct the voting of, the security; or (ii) dispose, ordirect the disposition of, the security. A person will also be deemed to beneficiallyown any equity securities that the person has the right to acquire within 60 days, aswell as any shares beneficially owned by members of a Section 13(d) group of whichthe person is a member.

In contrast, for all other purposes under Section 16, including the determinationof liability for short-swing profits under Section 16(b), a person will generally bedeemed to “beneficially own” any equity security in which the person directly orindirectly, through any contract, arrangement, understanding, relationship or

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Practice Tip: In order toavoid confusion about who isan “officer” for purposes ofSection 16, the board mayconsider passing a resolutionto identify by name thosepersons who fall within thiscategory.


otherwise, has or shares a direct or indirect “pecuniary interest.” A person will bedeemed to have a “pecuniary interest” in any class of equity securities if that personhas the opportunity, directly or indirectly, to profit or share in any profit derived froma transaction in such securities. In determining whether a person has an indirectpecuniary interest in a security, there are special rules that apply in the followingcircumstances, among others:

• Family Members. There is a rebuttable presumption that a person has anindirect pecuniary interest in any securities held by members of that person’s“immediate family” sharing the same household. For these purposes, aperson’s “immediate family” includes the person’s spouse, children,stepchildren, grandchildren, parents, stepparents, grandparents, siblings,mother-in-law, father-in-law, sons-in-law, daughters-in-law, brothers-in-lawand sisters-in-law.

• General Partners of Investment Funds. The general partner of a general orlimited partnership that holds portfolio securities is deemed to have aproportionate beneficial interest in those securities equal to the greater of:(i) the general partner’s share of the partnership’s profits; or (ii) the generalpartner’s share of the partnership capital account.

• Trusts. Depending upon the nature and structure of a trust, any of the trust orits settlor, trustees, beneficiaries or remaindermen may be deemed to have apecuniary interest in securities held by the trust. However, a settlor,beneficiary or remainderman will not be deemed to beneficially own thesecurities held by the trust unless the person exercises “investment control”over such securities. Trustees, who generally have investment control overthe trust’s securities due to the nature of their duties, will be deemed to havea pecuniary interest in securities held by a trust in a variety of circumstances.For example, a trustee will be deemed to have a pecuniary interest in thetrust’s holdings if it receives certain non-qualifying performance-relatedfees. Likewise, a trustee will have a pecuniary interest in the trust’s holdingsif at least one beneficiary of the trust is a member of the trustee’s immediatefamily. In the latter circumstance, the pecuniary interest of the immediatefamily member will be attributed to and reportable by the trustee.

The reporting obligations of Section 16(a), the liability provisions ofSection 16(b) and the prohibition on short sales contained in Section 16(c) apply

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generally to all equity securities of or relating to a public company which has any classof registered equity security. For purposes of Section 16, the SEC has by rule adopteda definition of “equity security” that is broader than the definition used for otherpurposes under the Exchange Act. Under Exchange Act Rule 3a11-1, the term “equitysecurity” includes:

. . . any stock or similar security, certificate of interest or participation in anyprofit sharing agreement, preorganization certificate or subscription,transferable share, voting trust certificate or certificate of deposit for anequity security, limited partnership interest, interest in a joint venture, orcertificate of interest in a business trust; any security future on any suchsecurity; or any security convertible, with or without consideration into sucha security, or carrying any warrant or right to subscribe to or purchase such asecurity; or any such warrant or right; or any put, call, straddle, or otheroption or privilege of buying such a security from or selling such a securityto another without being bound to do so.

This definition encompasses not only the company’s common stock, but alsopreferred stock, derivative securities (e.g., stock options, warrants, convertiblesecurities, and stock appreciation rights) and any other instrument that represents anequity stake in the company.

Section 16(a): Reporting Transactions by Insiders

As noted above, Section 16 insiders must file reports with the SEC disclosingtheir beneficial ownership of and transactions in a public company’s equity securities.The three forms on which Section 16 insiders must make these reports – Forms 3, 4and 5 – are described in greater detail below.

Form 3: Initial Statement of Beneficial Ownership of Securities. Section 16insiders must file an initial report on Form 3 with the SEC within 10 days of becomingsubject to Section 16. For a person who is elected an officer or director of a companythat already has a class of equity securities registered under Section 12, the 10-dayperiod begins when the person becomes an officer or director. Persons who areofficers, directors or greater than 10% shareholders of a company that registers a classof equity securities (and did not previously have a class of registered equity securities)are required to file a Form 3 on the effective date of the company’s registrationstatement. In any case, the Form 3 must disclose all equity securities of the company

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that the Section 16 insider beneficially owned on the date the person became subject toSection 16. Even if a director or officer owns no securities on the date he or shebecame a Section 16 insider, he or she is still required to file a Form 3.

Recent Development: Section 929R of the Dodd-Frank Act amended Section 16of the Exchange Act to authorize the SEC to establish by rule a shorter time periodwithin which a new Section 16 insider would be required to file a Form 3. As thishandbook goes to publication, the SEC has not proposed any rule change thatwould shorten the current 10-day reporting window.

In certain circumstances, the Section 16insider should file an initial Form 3 earlierthan is required. As discussed below, aSection 16 insider generally must reportchanges in his or her beneficial ownership ofthe company’s equity securities within twobusiness days. If the Section 16 insider’sbeneficial ownership of the company’s equitysecurities changes between the date the

Section 16 insider becomes subject to Section 16 and the date he or she must file aForm 3 (e.g., where a new director is granted restricted stock upon his or herappointment), the SEC recommends that the Section 16 insider file an initial Form 3concurrently with a Form 4 reporting the change, notwithstanding that the rules permitthe Form 3 to be filed at a later date.

Form 4: Statement of Changes in Beneficial Ownership. After filing a Form 3, aSection 16 insider must report any subsequent change in his, her or its beneficialownership of the company’s equity securities by filing a Form 4 within twobusiness days, unless the transaction is exempt from reporting or is eligible fordeferred reporting.

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Practice Tip: In order to assistincoming directors and officers inmeeting their compliance obligations,companies generally require suchpersons to complete a questionnairethat requests information about theirbeneficial ownership of thecompany’s securities.


Stock options are derivative securitiesfor purposes of Section 16(a). Therefore, aSection 16 insider must report on Form 4,within two business days, any grant ofoptions or any other acquisitions of thecompany’s equity securities. Similarly, theSection 16 insider must report on Form 4any exercise or conversion of a derivativesecurity of the company.

Transactions that must be reported on Form 4 include, but are not limited to:

• non-exempt purchases and sales of equity securities held in the Section 16insider’s name;

• transactions involving equity securities held by others but that the Section 16insider is deemed to beneficially own (i.e., equity securities in which theSection 16 insider has a “pecuniary interest,” as discussed above);

• exercises or conversions of derivative securities;

• acquisitions and grants of any of the company’s equity awards (includingoptions), even if not presently exercisable;

• entry into various other derivative transactions, including equity swaps andsimilar hedges;

• awards to non-employee directors made pursuant to equity incentive plans;

• equity securities received from a non-exempt dividend reinvestment; and

• dispositions of equity securities to the company (e.g., the company’sretention of shares to pay the Section 16 insider’s tax withholding obligationupon the exercise of stock options).

Following an IPO, the directors and officers of the previously non-publiccompany may be required to report certain pre-IPO transactions in the company’sequity securities. Such a filing obligation may arise if the director or officer engages ina reportable transaction less than six months after the date that the company’sregistration statement became effective. In such event, the director or officer is

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Practice Tip: In the case of anopen market purchase or sale, it isthe date the transaction is executed,not the settlement date, that triggersthe two-business-day deadline.Therefore, a Section 16 insider andits broker should develop a systemto ensure prompt communication assoon as any transaction is executed.


required to “look back” for a period of six months from the date of the reportabletransaction and report on its first required Form 4 any transactions in the company’sequity securities that occurred during that period. Persons who are Section 16 insidersby virtue of being greater than 10% shareholders are not subject to this six-monthlook-back period.

Depending upon the circumstances, a covered officer or director may also berequired to report transactions in the company’s equity securities that occurred afterthe termination of that person’s officer or director status. An otherwise reportabletransaction occurring after the cessation of a person’s officer or director status will bereportable on Form 4 if (and only if) the transaction is not exempt from Section 16(b)and occurs within six months of an “opposite way” transaction that was also subject toSection 16(b) and occurred while the person was still a director or officer. Forpurposes of this rule, an acquisition and subsequent disposition (or vice versa) areconsidered “opposite way” transactions. In contrast, a person who is a Section 16insider solely by virtue of being a greater than 10% shareholder ceases to be subject toSection 16 reporting requirements once the person ceases to be a greater than 10%shareholder.

The SEC has adopted a variety of exemptions from the reporting requirements ofSection 16(a) based upon the nature of the transaction. These exemptions apply to thefollowing types of transactions:

• any increase or decrease in the number of equity securities held as a result ofa stock split or a stock dividend applying equally to all securities of a class;

• the acquisition of rights, such as shareholder or preemptive rights, pursuantto a pro rata grant to all holders of the same class of registered equitysecurities;

• transactions that effect only a change in the form of beneficial ownershipwithout changing the person’s pecuniary interest in the subject equity securities(note, however, that this exemption does not cover the exercise and conversionof derivative securities or deposits to and withdrawals from voting trusts);

• certain transactions pursuant to tax-conditioned employee benefit plans;

• acquisitions made pursuant to a dividend reinvestment plan, provided thatthe plan meets certain requirements specified in Rule 16a-11 under theExchange Act;

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• acquisitions or dispositions of an equity security pursuant to a domesticrelations order;

• the disposition or closing of a long derivative security position as a result ofcancellation or expiration, provided that the Section 16 insider receives novalue in exchange for the expiration or cancellation;

• transactions effected by a person who was not a director, officer or greaterthan 10% shareholder at the time of the transaction;

• under certain circumstances, transactions occurring after the termination ofinsider status (see above discussion); and

• transactions by a greater than 10% shareholder that occur after thecompany’s termination of its registration under Section 12 of the ExchangeAct, or transactions by a director or officer that occur not less than sixmonths after such termination.

In addition to the above exemptions, the SEC has adopted a number ofexemptions based upon the status of the Section 16 insider. Depending on thecircumstances, certain of these exemptions may be available to executors and otherfiduciaries, odd-lot dealers, market makers, arbitrageurs, and underwriters and otherpersons who participate in a distribution of the company’s equity securities.

Form 5: Annual Statement of Changes in Beneficial Ownership. A Section 16insider must report certain transactions on a year-end report on Form 5 within 45 daysafter the end of the company’s fiscal year. Some transactions, most notably gifts, arenot required to be reported on Form 4, but must be reported on Form 5. A Section 16insider is required to file a year-end Form 5 to report any transaction that the personshould have reported during the fiscal year on Form 3 or Form 4, but did not.Transactions reportable on Form 5 are limited to the following:

• certain transactions occurring during the most recent fiscal year that areexempt from short-swing profit liability under Section 16(b), such as bonafide gifts of the company’s equity securities, but excluding exempttransactions which involve the company;

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• qualifying de minimis acquisitions of the company’s equity securities;19 and

• transactions that the Section 16 insider should have reported on Form 3 orForm 4 during the most recent fiscal year, but did not.

Disclosure of Reporting Delinquencies; Compliance Programs. Item 405 ofRegulation S-K requires a company to disclose in its annual proxy statement andannual report on Form 10-K certain information regarding the failure of any Section 16insider to timely file a Section 16 report during the previous fiscal year or prior fiscalyears. For each such delinquent Section 16 insider, the company is required to set forththe number of late reports, the number of transactions that were not reported on atimely basis, and any known failure to file a required Form 3, 4 or 5. Although there isno official sanction placed upon the company as a result of the filing delinquencies ofits insiders, such disclosures are potentially embarrassing.

Accordingly, every public company should develop and implement a strongcompliance program to ensure that its directors and officers timely file all requiredreports. In addition to minimizing the potential for embarrassing disclosures of thetype described above, a strong compliance program will assist the company’s directorsand officers in avoiding both short-swing liability under Section 16(b) and SECenforcement actions to enforce Section 16(a)’s reporting requirements.

Filing Procedures and Website Posting. All Section 16(a) reports must be filedwith the SEC electronically using the SEC’s EDGAR filing system, and all reportsbecome publicly available immediately upon filing. In order to file electronically, aSection 16 insider must first file a Form ID and obtain EDGAR filing codes, including aCentral Index Key (CIK), a CIK Confirmation Code (CCC) and an EDGAR password.Information on becoming an EDGAR filer is available at the SEC’s EDGAR FilerManagement website at https://www.filermanagement.edgarfiling.sec.gov/

19 A de minimis acquisition of the company’s securities is eligible for deferred reporting on a year-endForm 5 if: (i) the acquisition, when aggregated with all other unreported and non-exempt acquisitions ofsecurities of the same class within the prior six months, does not exceed $10,000 in market value; and(ii) the Section 16 insider does not, within six months thereafter, make any disposition of the securities,other than by a transaction exempt from Section 16(b). However, once these conditions are no longer met,the Section 16 insider is required to report all previously deferred small acquisitions on Form 4 within twobusiness days of the date the conditions are no longer satisfied. Further, acquisitions of a de minimisamount of securities from the company, including acquisitions pursuant to an employee benefit plansponsored by the company, are not eligible for deferred reporting on a year-end Form 5.

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Directors and officers commonly authorize certain employees of the company toprepare and file all necessary Section 16(a) reportson their behalf. The power-of-attorney grantingthese authorizations must be filed as an exhibit to theinsider’s first Section 16(a) report signed under thepower-of-attorney.

A company that maintains a corporate website mustpost any Form 3, 4 or 5 filed with respect to itssecurities by the end of the business day after thefiling. Each filing must remain accessible on thecompany’s website for a 12-month period thereafter.

SEC Enforcement Actions. There are a number ofmeans by which the SEC is authorized to enforcecompliance with Section 16(a). First, the SEC may

issue a cease-and-desist order requiring the respondent to cease and desist fromcommitting further violations of Section 16(a). Such an order may be issued to aSection 16 insider (for failure to timely file reports) or the company that issued thesecurities (for failure to properly disclose filing delinquencies by its Section 16insiders). Second, the SEC may seek civil monetary penalties in federal court underSection 21(d)(3) of the Exchange Act. Finally, the SEC may seek injunctive reliefunder Sections 21(d) and (e) of the Exchange Act.

Section 16(b): Liability for “Short-Swing” Profits

Under Section 16(b), any “short-swing” profit that a Section 16 insider realizesfrom trading in the company’s securities or derivatives thereof (whether or not issuedby the company) is subject to disgorgement. A “short-swing” profit is any “profit”resulting from any combination of purchase and sale or sale and purchase of thecompany’s equity securities, including “derivative securities,” within six months ofeach other. As noted above, “derivative securities” include puts, calls, options, equityswaps and other rights. To determine whether a Section 16 insider has realized a“profit,” the highest sale price within the six-month period is matched against thelowest purchase price. Due to the manner in which “profit” is computed – the so-called“highest-in, lowest-out” method – it is possible for a Section 16 insider to suffer a lossfrom a series of transactions yet still be subject to short-swing profit liability.

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Practice Tip: Beforeapplying for EDGAR filingcodes on behalf of anincoming director orofficer, a company should:(i) consider obtaining apower-of-attorney from theperson; and (ii) verify thatthe person has not alreadyobtained EDGAR filingcodes in connection withreporting requirements foranother company.


Liability under Section 16(b) is imposed ina mechanical fashion without regard to theSection 16 insider’s intent, and good faithis not a valid defense. All that is necessaryfor a successful claim is to show that theSection 16 insider realized profits on ashort-swing transaction.

A Section 16 insider may be liable even ifdifferent shares were involved in thepurchase and sale transactions or if losseswere incurred on transactions in the sameperiod. In addition, the terms “purchase”and “sale” are broadly defined and are notlimited to their traditional meanings.Examples of transactions that mayconstitute a sale under Section 16(b)include the sale of pledged stock by a

pledgee and certain conversions or redemptions of securities.

Section 16(b) is also applicable to a transaction by a covered officer ordirector that occurs after the person ceases to be an officer or director, provided that itis a transaction not exempt from Section 16(b) occurring within six months of anopposite-way, non-exempt transaction that occurred while the person was an officer ordirector. However, Section 16(b) is not applicable to transactions by an officer ordirector that occurred before the person became an officer or director. Similarly,transactions by a greater than 10% shareholder are only subject to Section 16(b) to theextent that they take place during the period in which the person is a greater than 10%shareholder. Accordingly, the purchase that brings a shareholder over the 10%threshold may not be matched against subsequent transactions for purposes ofestablishing short-swing profit liability. Likewise, a transaction that occurs after theformer greater than 10% shareholder has fallen below the 10% threshold cannot bematched against a transaction that occurred prior to that time, even if the twotransactions are within six months of each other.

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Practice Tip: The sale or purchaseof company securities by aSection 16 insider’s spouse, minorchildren or other relatives who sharethe Section 16 insider’s home maybe matched against transactionsmade by the Section 16 insider, ifsuch transactions are made within asix-month period. Section 16(b) isfull of such traps and difficulties. Forexample, purchases or sales byothers of shares in which theSection 16 insider is deemed to havea “pecuniary interest” will bematched against the Section 16insider’s own transactions.


Certain other transactions are exempt from Section 16(b), including:

• transactions exempt from the reporting requirements of Section 16(a);

• certain transactions between the company and its officers or directors (asdiscussed in greater detail below);

• gifts and inheritances; and

• exercises and conversions of stock options and other derivative securities.

As noted above, certain transactions between a company and its officers ordirectors (but not a greater than 10% shareholder) are exempt from Section 16(b).Under Rule 16b-3 under the Exchange Act, a transaction between a company(including an employee benefit plan sponsored by the company) and an officer ordirector of the company will be exempt from Section 16(b) if it meets certain specifiedconditions, as follows:

• A transaction (other than a “Discretionary Transaction”20) pursuant to acompany’s 401(k) plan, a qualified employee stock purchase plan or certainother tax-conditioned plans will generally be exempt from Section 16(b).

• A Discretionary Transaction will be exempt only if it is effected pursuant toan election made at least six months following the date of the most recentelection that effected an “opposite way” Discretionary Transaction under acompany plan.

• Any acquisition from the company other than a Discretionary Transaction(e.g., a grant or award) will be exempt from Section 16(b) if it is:(i) approved in advance by the board or a committee of the board that iscomposed solely of two or more non-employee directors; or (ii) approved orratified by a majority of the company’s shareholders. Such acquisitions willalso be exempt from Section 16(b) if the officer or director holds thesecurities acquired for a period of at least six months following the date ofacquisition.

20 A Discretionary Transaction is a transaction pursuant to an employee benefit plan that: (i) is at thevolition of a plan participant; (ii) is not made in connection with the participant’s death, disability,retirement or termination of employment; (iii) is not required to be made available to a plan participantpursuant to a provision of the Internal Revenue Code; and (iv) which results in either an intra-plan transferinvolving an company equity securities fund, or a cash distribution funded by a volitional disposition of acompany equity security.

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• Any disposition to the company other than a Discretionary Transaction willbe exempt from Section 16(b) if it is approved in advance in the mannerprescribed in (i) or (ii) of the previous bullet.

By law, a company cannot waive or release any claim it may have against aSection 16 insider, or enter into an enforceable agreement to provide indemnificationfor amounts recovered. If the company fails to pursue recovery itself within 60 days,any shareholder of the company may bring an action against the Section 16 insider. Anactive group of plaintiffs’ attorneys monitors Section 16(a) reports for short-swingtransactions.

Section 16(c): Prohibition of Short Sales by Insiders

Section 16(c) prohibits Section 16 insiders from effecting “short sales” and “salesagainst the box” of the company’s equity securities. A “short sale” is the sale ofsecurities that the seller does not own and that the seller delivers with borrowedsecurities or securities which it later acquires. A “sale against the box” is the sale ofsecurities that the seller owns but does not promptly deliver after the sale.

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FOREIGN PRIVATE ISSUER REPORTING AND COMPLIANCE

Public companies are generally subject to different obligations under U.S. federalsecurities laws depending on whether they are classified as U.S. domestic companiesor foreign private issuers. Because foreign private issuers are granted manyaccommodations which are unavailable to U.S. domestic companies, includinggenerally less stringent reporting and corporate governance requirements, it isimportant for a company to consider whether it qualifies as a foreign private issuer. Inaddition to discussing the criteria for determining foreign private issuer status, thefollowing discussion outlines the Exchange Act registration, reporting and corporategovernance obligations applicable to foreign private issuers, as well as the rules bywhich a foreign private issuer can deregister and no longer be subject to thoseobligations.

DETERMINING FOREIGN PRIVATE ISSUER STATUS

To be considered a “foreign private issuer,” a company must be incorporated ororganized under the laws of a non-U.S. jurisdiction and must not be owned andoperated primarily in the United States. A company will be considered to be ownedand operated primarily in the United States if:

• more than 50% of the company’s outstanding voting securities are owned byU.S. residents; and

• any of the following is true:

O a majority of the company’s executive officers or directors are U.S.citizens or residents;

O more than 50% of the company’s assets are located in the United States;or

O the company’s business is managed primarily in the United States.

Ownership Test. To determine whether the owners of a company’s outstandingvoting securities are U.S. residents, the company must first review its records andcount the number of record holders with a U.S. address. In addition, the company must“look through” accounts held by brokers, dealers, banks and other nominees, count thenumber of separate accounts for which securities are held and determine the amount ofsecurities beneficially owned by U.S. residents. A company must make thisdetermination with respect to nominee accounts located in the United States, as well asthose located in the company’s home market and principal trading market. If thecompany cannot, after reasonable inquiry, determine the jurisdiction in which a

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beneficial owner of its securities resides, it may assume that the owner resides in thejurisdiction in which its nominee has its principal place of business.

Status Review. A company that qualifies as a foreign private issuer must reviewits status each year at the end of its second fiscal quarter. If at that time the companyno longer qualifies as a foreign private issuer, it will be treated as a U.S. domesticcompany beginning on the first day of the company’s next fiscal year. For theremainder of the company’s fiscal year, however, it may continue to file reports and betreated as a foreign private issuer. It cannot reestablish its foreign private issuer statusuntil the end of the second fiscal quarter of the following year.

Practice Tip: If a company that qualifies as a foreign private issuer at the end of itsmost recently completed second fiscal quarter reincorporates in the United States, itwill immediately lose its foreign private issuer status. A U.S.-domiciled companycan never be a foreign private issuer, no matter how few U.S. shareholders it mayhave or where its assets, business, officers or directors are located. Accordingly,following reincorporation, the U.S.-domiciled company must immediately beginfiling Exchange Act reports on domestic issuer forms.

EXCHANGE ACT REGISTRATION

A foreign private issuer must register a class of its securities under the ExchangeAct in either of two circumstances:

U.S. Stock Exchange Listing. Under Section 12(b) of the Exchange Act, aforeign private issuer must register any class of its securities that will be listed on aU.S. stock exchange, such as the NYSE or NASDAQ. In addition to the periodicreporting requirements and other federal securities law obligations that accompanyExchange Act registration, a foreign private issuer with securities listed on a U.S.stock exchange must also abide by the listing standards of the relevant exchange.These listing standards, which generally contain favorable accommodations for foreignprivate issuers, are discussed more fully in the “Stock Exchange ListingRequirements” section of this handbook.

Substantial U.S. Presence. Under Section 12(g) of the Exchange Act, a foreignprivate issuer with more than $10 million in assets must register any class of its equitysecurities which is held by at least 500 persons, 300 or more of whom are U.S.residents.

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EXCHANGE ACT REPORTING AND OTHER OBLIGATIONS

Following the registration of a class of its securities under the Exchange Act orthe registration of a transaction under the Securities Act, a foreign private issuer andits significant shareholders become subject to certain reporting requirements under theExchange Act and to other obligations under the U.S. federal securities laws. Theseinclude:

• filing or furnishing periodic reports required by Sections 13(a) or 15(d) ofthe Exchange Act, such as annual reports on Form 20-F and current reportson Form 6-K;

• filing beneficial ownership reports on Schedules 13D or 13G; and

• complying with various obligations under SOX and the Dodd-Frank Act.

Annual Report on Form 20-F

A foreign private issuer with securities registered under the Exchange Act mustfile with the SEC an annual report on Form 20-F within six months after the end of itsfiscal year. For fiscal years ending on or after December 15, 2011, the filing deadlineis shortened to four months after the end of the foreign private issuer’s fiscal year. Theannual report must be in English and filed electronically via the SEC’s EDGARsystem.

The annual report on Form 20-F requires detailed disclosure about the foreignprivate issuer’s business, management, operating results and financial condition.Among the disclosure requirements for the annual report is information about anddescriptions of:

• the company’s business, property and organizational structure, including itsmaterial contracts;

• the company’s directors and officers, including descriptions of anyarrangements pursuant to which any of them were selected for the position,their compensation for the most recent fiscal year and their accrued pensionor similar benefits;

• the number of employees, including, if possible, a breakdown by categoriesof activities, any significant period to period change, and any arrangementsfor involving employees in ownership of the company;

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• certain related party transactions between the company and its officers,directors and principal shareholders;

• any home country exchange control regulations and any other home countryregulations that affect the company’s business;

• certain disclosure regarding management’s assessment of the company’sdisclosure and financial reporting procedures and controls, and certificationsfrom the company’s principal executive officer and principal financialofficer required under Sections 302 and 906 of SOX (discussed further in thesection of this handbook entitled “The Sarbanes-Oxley Act”);

• the company’s audit committee, its code of ethics applicable to its principalexecutive, financial and accounting officers, and services performed by andfees paid to its principal outside auditing firm; and

• certain selected financial information for the issuer’s five most recent fiscalyears.

In addition to the textual disclosure outlined above, foreign private issuers arerequired to include in the Form 20-F full financial statements, audited in accordancewith U.S. GAAP, IFRS as issued by the IASB (without a reconciliation to U.S.GAAP), or other GAAP or IFRS standards reconciled to U.S. GAAP, for the issuer’smost recent three fiscal years. Further, Item 5 of the Form 20-F annual report, entitled“Operating and Financial Review and Prospects,” requires the company’s managementto explain the factors driving the company’s financial condition and operating resultsand discuss the trends shaping its future prospects. This information is akin to theMD&A section in a U.S. domestic company’s annual report on Form 10-K, therequirements for which are discussed more fully in the “Periodic and CurrentReporting under the Exchange Act” section of this handbook. In December 2003, theSEC offered interpretive guidance21 on preparing this section, which it views as criticalto enabling investors to assess a company through the eyes of its management.Companies should carefully review that guidance in addition to the particular Form20-F item requirements when preparing the annual report.

21 Commission Guidance Regarding Management’s Discussion and Analysis of Financial Conditionand Results of Operations, Securities Act Release No. 33-8350, Exchange Act Release No. 34-48960,[2003-2004 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,127 (Dec. 29, 2003), available athttp://www.sec.gov/rules/interp/33-8350.htm#P24_4941.

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Current Reports on Form 6-K

In addition to the annual report on Form 20-F, foreign private issuers subject tothe Exchange Act’s reporting requirements are required to disclose the occurrence ofone or more specified events in a current report on Form 6-K. Current reports on Form6-K are analogous to the current reports on Form 8-K that must be filed by domesticreporting companies, and which are discussed further in the section of this handbookentitled “Periodic and Current Reporting under the Exchange Act.” A foreign privateissuer must report on Form 6-K any material information that it makes public in itshome country or sends to a stock exchange or its shareholders. Materials filed undercover of Form 6-K include press releases, shareholder reports and other materialinformation relating to any of the following:

• changes in the company’sbusiness;

• changes in the company’smanagement or control;

• acquisitions or dispositions ofassets;

• bankruptcy or receivership;

• changes in the company’s certifying accountants;

• the company’s financial condition and results of operations;

• material legal proceedings;

• changes in securities or in the security for registered securities;

• defaults upon senior securities;

• material increases or decreases in the amount of outstanding securities orindebtedness;

• the results of the submission of a matter to a vote of security holders;

• transactions with directors, officers or principal security holders;

• the granting of options or payment of other compensation to directors orofficers; and

• any other information the company considers to be of material importance tosecurity holders.

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Practice Tip: Reports furnished underForm 6-K are not deemed to be “filed”for purposes of Section 18 of theExchange Act and potential liability forfalse or misleading statements ofmaterial fact imposed under that section.


With certain limited exceptions, Form 6-K must be submitted to the SECelectronically via EDGAR promptly following the event to be reported. Failure topromptly submit a Form 6-K report may result in a foreign private issuer becomingineligible to offer its securities on Form F-3, the “short-form” Securities Actregistration statement.

Beneficial Ownership Reporting on Schedules 13D or 13G

Shareholders who acquire beneficial ownership of more than 5% of a class ofshares registered under Section 12 of the Exchange Act must file a report with the SECon Schedule 13D or, if eligible, on short-form Schedule 13G. These reportingobligations, which are discussed more fully in the “Ownership and Trading Reports byManagement and Large Shareholders” section of this handbook, apply regardless ofwhether the registered shares are issued by a foreign or domestic company. Shareholderswho acquire a foreign private issuer’s American Depositary Receipts (ADRs) must filethe required Schedule 13D or 13G report if the class of shares underlying the ADRs isregistered under Section 12 and the acquirer beneficially owns more than 5% of alloutstanding shares of the class.

SARBANES-OXLEY ACT OBLIGATIONS

SOX applies to all companies that arerequired to file reports under the ExchangeAct, regardless of whether the company isa domestic company or a foreign privateissuer. As discussed more fully in thesection of this handbook entitled “TheSarbanes-Oxley Act,” the SOX requirements are far-reaching and have resulted insignificant changes to the corporate governance and disclosure practices of ExchangeAct reporting companies. Many of these changes have been implemented throughamendments to the Exchange Act, while others are reflected in SEC rules and stockexchange listing requirements. Despite the general uniformity of SOX’s application toU.S. companies and foreign private issuers, the SEC and the stock exchanges haveadopted various exemptions to SOX requirements which benefit foreign privateissuers. We note these exemptions below in the course of our discussion of the generalSOX requirements which affect foreign private issuers.

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Practice Tip: Foreign private issuersthat furnish information to the SECunder Rule 12g3-2(b) of the ExchangeAct are generally not subject to SOX.We discuss the Rule 12g3-2(b)exemption from Exchange Actreporting in greater detail below.


Enhanced Audit Committee Standards and Audit Protections

Audit Committee Standards. Foreign private issuers with securities listed on aU.S. stock exchange must comply with certain listing standards designed to improvethe effectiveness and ensure the independence of the company’s audit committee.Among other things, these standards require that the audit committee:

• be directly responsible for appointing, compensating and overseeing thework of the company’s independent auditors and the auditors must reportdirectly to the audit committee;

• establish procedures to receive and handle complaints regarding accounting,internal controls or auditing matters, including procedures which enableemployees to submit accounting or auditing concerns confidentially andanonymously;

• have authority to engage independent counsel and other advisers;

• be provided with appropriate funding to pay administrative expenses and tocompensate the auditor and other advisers; and

• be composed entirely of members who are “independent” under Rule 10A-3of the Exchange Act and the listing requirements of the relevant exchange.

The required standards are not intended to conflict with or affect the applicationof any requirements imposed on a foreign private issuer by its organizationaldocuments or home country laws and practices, and instead relate to the allocation ofresponsibility between the audit committee and the issuer’s management. Accordingly,a foreign private issuer’s shareholders may vote on, approve or ratify auditor selection,compensation and termination if permitted or required to do so by the issuer’sorganizational documents or home country laws and practices, so long as anyrecommendation or nomination that the issuer provides to shareholders on thosematters comes from the audit committee. In addition, if a foreign private issuer’sorganizational documents or home country laws and practices prohibit or limit thedegree to which its board can delegate the above responsibilities to the auditcommittee, or vest such responsibilities in a government entity, then the auditcommittee must be granted those responsibilities to the extent permitted by law.

To be considered independent under Rule 10A-3, an audit committee membergenerally may not be an “affiliated person” of the company or accept any consulting,advisory or other compensatory fee from the company or its affiliates other than in the

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member’s capacity as a director. Foreign private issuers, however, may availthemselves of certain exemptions from the definition of “independence.” Theseexemptions, which are discussed in the section of this handbook entitled “TheSarbanes-Oxley Act,” are generally designed to allow a foreign private issuer to followthe practices required by its organizational documents and home country laws andpractices. For example, a foreign private issuer may include on its audit committee anon-management employee representative, a non-management affiliated person withonly observer status, such as a controlling shareholder, or a non-managementgovernmental representative. Furthermore, foreign private issuers may rely onexemptions from the independence requirements for a transitional period following aninitial public offering. A foreign private issuer must disclose its reliance on any ofthese exemptions in its annual report on Form 20-F and evaluate the impact of thevariance from the general independence requirements (see “Enhanced DisclosureRequirements” below).

Anti-Manipulation Rules. Under Rule 13b2-2 of the Exchange Act, directorsand officers of a foreign private issuer, or any other person acting under the directionof a director or officer, are prohibited from taking any action to improperly influencean auditor for the purpose of rendering the company’s financial statements materiallymisleading.

Management Certifications, Evaluations and Reports

Disclosure Controls and Procedures. Foreign private issuers must design andevaluate the controls and procedures used to ensure that information the company isrequired to disclose in its Exchange Act reports is accurately compiled andcommunicated to management in time to allow timely decisions regarding requireddisclosure. U.S. domestic companies are required to evaluate the effectiveness of theirdisclosure controls quarterly, whereas foreign private issuers must do so on a yearlybasis.

Internal Control Over Financial Reporting. The foreign private issuer’s annualreport on Form 20-F must contain a report by management on internal control overfinancial reporting which includes an assessment of the effectiveness of the internalcontrol structure and procedures for financial reporting as of the end of the fiscal yearand the framework used to assess the effectiveness, and disclosure of certain changesin internal control over financial reporting. If the foreign private issuer is anaccelerated filer or a large accelerated filer, the annual report must also contain an

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auditor attestation report expressing an opinion on management’s assessment ofinternal control over financial reporting.

Recent Development: Pursuant to Section 989G of the Dodd-Frank Act, foreignprivate issuers that are smaller reporting companies or non-accelerated filers are nolonger required to include an auditor attestation report on management’s assess-ment of internal control over financial reporting in their Form 20-F. Section 989Gamended SOX to require that only companies that are accelerated filers or largeaccelerated filers must include such an auditor attestation report in their annualreport.

Management Certifications. The foreign private issuer’s principal executiveofficer and principal financial officer must provide certain written certifications withthe company’s annual report on Form 20-F.

• Section 302 of SOX requires the relevant officers to certify that the annualreport does not contain any untrue statement of a material fact; that thefinancial statements and other financial information fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the company; and certain aspects of the design, evaluation andeffectiveness of the company’s disclosure controls and procedures andinternal control over financial reporting.

• Section 906 of SOX requires the relevant officers to certify that the annualreport fully complies with the Exchange Act and the information in thereport fairly presents in all material respects the financial condition andoperations of the company.

Financial Restrictions Applicable to Company Insiders

No Personal Loans to Executives. Subject to certain exceptions, SOX prohibitsforeign private issuers from extending or maintaining credit, arranging for theextension of credit, or renewing an extension of credit in the form of a personal loan toor for any director, executive officer, or any person holding an equivalent position.

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Regulation BTR – Blackout Trading Restriction. Regulation BTR prohibits aforeign private issuer’s directors and executive officers from purchasing, selling orotherwise acquiring or transferring any of the company’s equity securities (other thanexempted securities) during any “blackout period” with respect to the securities if theperson acquired the securities in connection with his or her service or employmentwith the company. A blackout period is any period of more than three consecutivebusiness days during which the ability to purchase or sell an interest in the company’ssecurities held in an “individual account plan,” such as 401(k) or other definedcontribution plan, is temporarily suspended with respect to not less than 50% of theparticipants or beneficiaries, the plan is located in the United States, and thoseparticipants or beneficiaries number at least 50,000 or in excess of 15% of the totalnumber of employees of the company and its consolidated subsidiaries.

For each blackout period, the company must notify in a timely manner eachdirector or officer and the SEC and provide additional information, such as the reasonfor the blackout period. U.S. domestic companies are required to notify the SECpromptly by filing a report on Form 8-K. In contrast, foreign private issuers, althoughencouraged to notify the SEC of the blackout period by filing a report on Form 6-K,are only required to file the notice as an exhibit to their annual report on Form 20-F.

Persons who trade a foreign private issuer’s securities in violation of RegulationBTR are liable to the company for any profits received through those trades. Inaddition, if a shareholder of the foreign private issuer requests the company tocommence an action to recover profits made in violation of Regulation BTR and thecompany fails to do so within 60 days of the request, the shareholder may initiate aderivative action to recover the profit on the company’s behalf.

Practice Tip: The blackout trading restrictions of Regulation BTR do not apply toan individual account plan maintained outside of the United States primarily for thebenefit of nonresident aliens, or to a plan which has been approved by a foreigntaxing authority or is eligible for preferential treatment under the tax laws of aforeign jurisdiction because the plan provides for broad-based employeeparticipation.

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Repayment of Certain Bonuses. If a foreign private issuer is required to preparean accounting restatement due to the company’s material noncompliance, as a result ofmisconduct, with any financial reporting requirement under the securities laws, SOXrequires the company’s principal financial officer and principal executive officer toreimburse the company for any bonus or other incentive-based or equity-basedcompensation received from the company during the 12-month period following thefirst public issuance or filing with the SEC (whichever is first) of the financialdocument being restated, and any profits received from the sale of the company’ssecurities during that period. See also the section of this chapter entitled “Dodd-FrankAct Obligations—Corporate Governance” below regarding potential additionalclawback requirements that may apply to foreign private issuers following theenactment of the Dodd-Frank Act.

Practice Tip: Neither SOX nor the SEC’s implementing rules clarify what con-stitutes “misconduct,” but U.S. federal courts have held that a CEO or CFO mustreimburse the company for any covered compensation or profits regardless ofwhether or not the person knew of or engaged in the misconduct which led to therestatement. It is unclear how these rules would be enforced in the event therepayment obligation would violate the employee’s rights under home country law.

Enhanced Disclosure Requirements

Annual Report on Form 20-F. In its annual report on Form 20-F, a foreignprivate issuer must include the following additional disclosures:

• any “material correcting adjustments” to the company’s financial statementswhich have been identified by the company’s independent auditors;

• any off-balance sheet arrangements;

• certain contractual obligations in specified tabular form;

• certain additional information in connection with the use of non-GAAPfinancial measures, such as EBITDA, including appropriate quantitativereconciliations;

• whether the company’s audit committee has at least one member who is an“audit committee financial expert” under SEC rules and whether thatmember is independent;

• if the company does not have an audit committee financial expert, anexplanation of why not;

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• if the company is relying on any exemptions from the independencerequirements for audit committees available under Rule 10A-3 of theExchange Act, a statement to that effect, including whether the reliance willhave a material adverse effect on the audit committee’s ability to actindependently and satisfy the other requirements of Rule 10A-3;

• the amount of professional fees paid to the company’s auditor for audit andnon-audit services and the company’s pre-approval policies with respect tothe provision of non-audit services;

• whether the company has adopted a code of ethics for senior financialofficers, and if not, why not;

• whether the company has amended its code of ethics or granted any waiversunder it during the past year; and

• the text of the company’s code of ethics, either as an exhibit to the annualreport or on the company’s website.

Regulation G. Regulation G, which governs the use of non-GAAP financialmeasures contained in a company’s financial statements, press releases and otherpublic information, requires a company that presents such measures to do so in amanner that is not misleading, include the most directly comparable financial measurecalculated and presented in accordance with GAAP, and include a quantitativereconciliation to that measure. Although Regulation G applies generally to foreign anddomestic companies, a foreign private issuer is exempted if:

• its securities are listed or quoted on an non-U.S. exchange;

• the non-GAAP financial measure is not derived from or based on a measurecalculated and presented in accordance with U.S. GAAP; and

• the disclosure is made or included in a communication outside the UnitedStates prior to or contemporaneously with the release in the United Statesand the release is not otherwise targeted at persons located in the UnitedStates.

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DODD-FRANK ACT OBLIGATIONS

Although its principal impact is on the financial services sector, the Dodd-FrankAct also includes significant corporate governance and securities law reforms affectingpublic companies, including foreign private issuers whose securities are listed in theUnited States. At present, the full extent of the Dodd-Frank Act’s impact on foreignprivate issuers remains unclear, as many of the Act’s provisions await implementationby SEC regulations and stock exchange listing requirements. A general overview ofthe key corporate governance and securities law provisions of the Dodd-Frank Actappears in the section of this handbook entitled “The Dodd-Frank Wall Street Reformand Consumer Protection Act.” We discuss below certain Dodd-Frank Act provisionsthat are likely to be of interest to foreign private issuers.


Many of the corporate governance reforms contained in the Dodd-Frank Actrelate to the U.S. proxy rules and proxy statement disclosure requirements, which donot generally apply to foreign private issuers. These reforms include the Dodd-Frankact provisions concerning “say-on-pay,” proxy access, disclosure of executivecompensation and golden parachute arrangements, pay vs. performance, employee anddirector hedging policies, and board leadership structures. Nevertheless, subject to anyexemptions that the SEC may provide in its implementing rules, the following Dodd-Frank Act corporate governance provisions could apply to foreign private issuers:

Compensation Committee Independence. Section 952 of the Dodd-Frank Actdirects the SEC to issue rules requiring U.S. stock exchanges to prohibit the listing ofany company unless all members of its compensation committee are independent,taking into account relevant factors to be established by the SEC, such as the source ofthe member’s compensation, including any consulting, advisory or other fees, and theaffiliations of the member with the company and its subsidiaries and affiliates. Theseindependence requirements do not apply to foreign private issuers that annuallydisclose to their shareholders the reasons why they do not have an independentcompensation committee.

Compensation Consultants and Advisors. Section 952 of the Dodd-Frank Actalso requires that public company compensation committees have the authority toretain their own compensation consultants, independent legal counsel and otheradvisors, and that such committees be directly responsible for the compensation andoversight of such advisors. A compensation committee is not, however, required to

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implement any advice received from an advisor so retained. Public companies mustprovide appropriate funding to the compensation committee to retain such advisors. Inaddition, Section 952 directs the SEC to issue rules requiring U.S. stock exchanges toprohibit the listing of any company whose compensation committee engages aconsultant, legal counsel or other advisor without taking into consideration factorsidentified by the SEC as affecting the independence of such advisors.

Pay Equity. Section 953 of the Dodd-Frank Act directs the SEC to amend Item402 of Regulation S-K to require that public companies disclose the median of thetotal annual compensation of all employees other than the CEO, the total annualcompensation of the CEO, and a ratio comparing the two amounts. The calculationsmust be determined in accordance with the rules for named executive officercompensation. Although this “pay equity” provision is akin to the “pay vs.performance” and other proxy statement disclosure requirements which are generallyinapplicable to foreign private issuers, the provision applies to any filings described inItem 10(a) of Regulation S-K (which includes “annual or other reports under sections13 and 15(d) . . . and any other documents required to be filed under the ExchangeAct”). Accordingly, it is unclear whether this provision will be applied to foreignprivate issuers.

Incentive Compensation Clawback Policy. Section 954 of the Dodd-Frank Actprovides that the SEC must issue rules requiring U.S. securities exchanges to prohibitthe listing of any company that does not adopt and implement clawback policies whichenable the company to recover incentive-based compensation from current or formerexecutive officers in the event the company is required to prepare an accountingrestatement due to material noncompliance with any financial reporting requirementunder the securities laws. The clawback would apply to any incentive-basedcompensation (including stock options) received in excess of what would have beenpaid under the restatement, would have a 3-year look-back period running from thedate on which the company is required to prepare the restatement, and would applyirrespective of whether any fraud or misconduct was involved.

Whistleblower Protections

The Dodd-Frank Act enhances the protections and rewards available to corporatewhistleblowers who provide original information about violations of U.S. securitieslaws. Under Section 922 of the Dodd-Frank Act, whistleblowers may be awardedbetween 10% and 30% of any successful enforcement action resulting in monetary

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sanctions in excess of $1 million. These whistleblower protections and rewards applyequally to non-U.S. persons in actions brought against foreign private issuers. Section922 also includes new legal protections for employee whistleblowers who areretaliated against by their employers for providing information or assistance to theSEC. These protections include the creation of a new private right of action that maybe brought in U.S. federal court, and remedies including reinstatement, two times backpay plus interest, and legal costs and reasonable attorney’s fees. In addition, subject tocertain exceptions, the SEC is prohibited from disclosing any information which couldreasonably be expected to reveal the identity of the whistleblower.

The Dodd-Frank Act also expands the existing whistleblower protections of SOXby (i) extending whistleblower protections to cover employees of a public company’sconsolidated subsidiaries and affiliates, (ii) extending the statute of limitations forSOX whistleblower retaliation claims from 90 to 180 days after the employee becameaware of the retaliatory conduct, (iii) prohibiting the waiver of whistleblowerprotections by any agreement, policy or condition, including a pre-dispute arbitrationagreement, and (iv) clarifying a whistleblower claimant’s right to a jury trial.

Extractive Industries, Conflict Minerals and Mine Safety Disclosures

Title XV of the Dodd-Frank Act contains three “Miscellaneous Provisions” thatimpose new disclosure obligations on public companies that operate in certainextractive industries or use specified conflict minerals in their products or productionmethods. Title XV does not expressly exempt foreign private issuers from itsprovisions, and as of this handbook’s publication it is unclear whether these disclosurerequirements will apply to foreign private issuers.

Use of Conflict Minerals. Section 1502 of the Dodd-Frank Act requires theSEC to enact rules by April 15, 2011 requiring certain public companies to disclosewhether their products or production methods use conflict minerals that originated inthe Democratic Republic of Congo or its adjoining countries. Conflict minerals aredefined as columbite-tantalite (coltan), cassiterite, gold, wolframite, or theirderivatives, and any other minerals or derivatives determined by the Secretary of Stateto be financing conflict in the Democratic Republic of the Congo or an adjoiningcountry.

On December 15, 2010, the SEC issued proposed rules to implementSection 1502. Under the proposed rules, if conflict minerals are necessary to the

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functionality or production of a product manufactured, or contracted to bemanufactured, by a public company, the public company would be required to disclosewhether its conflict minerals originated in the Democratic Republic of the Congo or anadjoining country. If the conflict minerals originated in the Democratic Republic of theCongo or an adjoining country (or if the company is not able to conclude that itsconflict minerals did not originate in such countries), the company would be requiredto furnish a “Conflict Minerals Report” as an exhibit to its annual report that includes,among other matters, a description of the measures taken by the company to exercisedue diligence on the source and chain of custody of its conflict minerals. These duediligence measures would include, but would not be limited to, an independent privatesector audit of the company’s report conducted in accordance with standardsestablished by the Comptroller General of the United States. The Conflict MineralsReport would be required to include a description of the products manufactured orcontracted to be manufactured that are not “DRC conflict free.” “DRC conflict free” isdefined in Section 1502 to mean products that do not contain minerals that directly orindirectly finance or benefit armed groups in the Democratic Republic of the Congo oran adjoining country. Any company required to furnish a report would be required tocertify that it obtained an independent private sector audit of its report and make itsreports available to the public on its website.

Payments by Resource Extraction Issuers. Under Section 1504 of the Dodd-FrankAct, the SEC is required to enact rules by April 15, 2011 requiring public companies thatengage in the commercial development of oil, natural gas or minerals (“resource extractionissuers”) to disclose any payments they or their subsidiaries have made to the U.S. orforeign governments for the purpose of commercial development of those resources. TheSEC issued proposed rules implementing Section 1504 on December 15, 2010.

Mine Safety. Pursuant to Section 1503 of the Dodd-Frank Act, publiccompanies that operate coal or other mines must disclose in their periodic reportsdetailed information related to health and safety violations under the Federal MineSafety and Health Act of 1977, as well as any pending legal actions before the FederalMine Safety and Health Review Commission. The SEC issued proposed rulesimplementing Section 1503 on December 15, 2010.

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KEY ACCOMMODATIONS FOR FOREIGN PRIVATE ISSUERS

In addition to the various exemptions and accommodations from SOX, the Dodd-Frank Act and their respective implementing SEC rules and stock exchange listingrequirements described above, the U.S. federal securities laws and SEC rules provideforeign private issuers with the following key accommodations:

Exemption from Section 16 Reporting and Short-Swing Profit Rules. Asdiscussed in the section of this handbook entitled “Ownership and Trading Reports byManagement and Large Shareholders,” under Section 16(a) of the Exchange Act andrelated SEC rules, any person who is an officer, director, or greater than 10%shareholder of a public company must file statements with the SEC reporting theirbeneficial ownership of the company’s securities. These “Section 16 insiders” are alsosubject to the short-swing profit rules of Section 16(b), which require them to disgorgeany profits resulting from the purchase and sale or the sale and purchase of thecompany’s securities which occur within six months of each other. These insiderreporting and short-swing profit rules do not apply to securities of a foreign privateissuer.

Exemption from Proxy Rules. Foreign private issuers do not have to complywith U.S. federal securities laws which govern the procedures and documentationrequired for soliciting the votes of shareholders.

Exemption from Regulation FD. Foreign private issuers are exempted fromcompliance with Regulation FD, which requires companies to publicly disclose anymaterial non-public information that has been selectively disclosed to the company’sshareholders or certain enumerated persons, which generally include securities marketprofessionals such as securities analysts, selected institutional investors or otherholders of the company’s securities who could reasonably be expected to trade on thebasis of the information disclosed. Under Regulation FD, when a U.S. domesticcompany, or a person acting on its behalf, discloses material nonpublic information tothese persons, it must disclose that information publicly. The timing of the requiredpublic disclosure depends on whether the selective disclosure was intentional ornon-intentional. Intentional disclosures must be made public simultaneously;non-intentional disclosures must be made public promptly. Although a foreign privateissuer is not subject to Regulation FD, it may be required to publicly disclose theinformation covered by Regulation FD under its home country rules, in which case itmay file a report on Form 6-K with the SEC to satisfy its disclosure obligations in theUnited States.

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Practice Tip: Many foreign private issuers elect to comply with Regulation FD asa best practice, in order to minimize their potential Exchange Act liability forinsider trading based on selective disclosure.

No Quarterly Reporting Requirement. The Exchange Act requires U.S.domestic companies to file quarterly reports on Form 10-Q which contain quarterlyfinancial information (see the “Periodic and Current Reporting under the ExchangeAct” section of this handbook for a discussion of the requirements of Form 10-Q). Nosuch requirement applies to foreign private issuers. Nevertheless, where a foreignprivate issuer is required to publish quarterly information under its home country rulesor the rules of the exchange on which its securities are listed or quoted, or where it hasagreed to provide such information to its shareholders, it must furnish suchinformation to the SEC on Form F-6.

No Form 8-K Filings. Unlike U.S. domestic companies, foreign private issuersare not required to file current reports with the SEC on Form 8-K. Instead, foreignprivate issuers must furnish the SEC under cover of Form 6-K a copy of any materialinformation it makes or is required to make public in its home country or send to astock exchange or its shareholders.

Financial Statement Preparation – IFRS, U.S. or local GAAP. Although theSEC has proposed allowing and eventually requiring U.S. domestic companies toreport financial results in accordance with IFRS as issued by the IASB, currently U.S.domestic companies are required to prepare financial statements in accordance withU.S. GAAP. Foreign private issuers, however, may prepare their financial statementsin U.S. GAAP, IFRS as issued by the IASB, or local home country GAAP. A foreignprivate issuer that prepares its financial statements according to non-IASB IFRS orlocal home country GAAP must include a reconciliation to U.S. GAAP.

Listing Requirements. U.S. stock exchanges such as NYSE and NASDAQgenerally have alternate listing standards for foreign private issuers which allow themto follow their home country practices in many instances, while requiring disclosure ofthe significant ways in which home country practices differ from those followed byU.S. domestic companies listed on a U.S. exchange. The particular listing standardsapplicable to foreign private issuers listed on NYSE and NASDAQ are discussed morefully in the section of this handbook entitled “Stock Exchange Listing Requirements.”

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FOREIGN PRIVATE ISSUER DEREGISTRATION

Despite the accommodations accorded to foreign private issuers, the extensivereporting and corporate governance obligations imposed by the Exchange Act andSOX have led many foreign private issuers to consider terminating their obligationsunder those laws by deregistering their securities.

Equity Securities

Under Rule 12h-6 of the Exchange Act, a foreign private issuer with a class ofequity securities registered under Section 12 of the Exchange Act can deregister thosesecurities and terminate its reporting obligations if it meets either of the followingcriteria:

• the U.S. average daily trading volume (ADTV) of the securities has been nogreater than 5% of the worldwide ADTV of the securities during the mostrecent 12-month period; or

• the securities are held of record by fewer than 300 U.S. residents or 300persons on a worldwide basis.

In determining the number of U.S. record holders, a foreign private issuer usesthe same “look-through” principles described in “Ownership Test” above. A foreignprivate issuer that has delisted its securities from a U.S. stock exchange or terminated asponsored ADR facility in those securities within the previous 12 months may notderegister those securities in reliance on the ADTV test unless it met the 5% ADTVbenchmark at the time of delisting or termination. If at that time the foreign privateissuer did not meet the 5% benchmark, it must wait an additional 12 months before itcan deregister in reliance on the ADTV test.

In addition to meeting either the ADTV or record holder tests outlined above, tobe eligible to deregister a foreign private issuer must meet the following additionalconditions:

• it must have had Exchange Act reporting obligations for at least the 12months preceding deregistration, have filed or furnished all reports requiredfor that period, and have filed at least one annual report;

• subject to certain exceptions, it must not have offered its securities pursuantto a Securities Act registration statement during the 12 months precedingderegistration; and

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• it must have maintained a listingof the subject securities for atleast 12 months prior to dereg-istration on at least one non-U.S.exchange that constitutes itsprimary trading market.

Under the rule, primary tradingmarket means a market that accounted forat least 55% percent of the worldwidetrading in the relevant securities, either alone or together with another non-U.S.market. If the foreign private issuer aggregates trading in two non-U.S. markets toreach the 55% worldwide trading threshold, then the trading in at least one of themmust be greater than the trading in the United States.

Practice Tip: To calculate its ADTV, a foreign private issuer may use commercialservice providers and publicly available sources it reasonably believes are reliable.The U.S. ADTV calculation must include all trading in the subject securities,whether on an exchange or over-the-counter. The worldwide ADTV may alsoinclude off-market transactions so long as the information is reasonably reliableand not duplicative.

Debt Securities

Under Rule 12h-6(c), a foreign private issuer may terminate its Exchange Actreporting obligations with respect to a class of registered debt securities if it meets thefollowing conditions:

• it has filed or furnished all of its required Exchange Act reports, including atleast one annual report, since it registered the debt securities; and

• the securities are held of record by fewer than 300 U.S. residents or 300persons on a worldwide basis.

RULE 12g3-2(b) EXEMPTION

Rule 12g3-2(b) provides foreign private issuers with an exemption fromExchange Act registration and reporting in circumstances where the company’s sharesare not listed on a U.S. stock exchange, yet the number of its U.S. resident

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Practice Tip: A foreign privateissuer that has sold securities in theUnited States during the past 12months pursuant to an exemptionfrom Securities Act registration, suchas Rule 144A or Rule 802, may stillbe eligible to deregister underRule 12h-6.


shareholders could potentially trigger an obligation to register under Section 12(g) ofthe Exchange Act. Foreign private issuers that deregister under Rule 12h-6 are eligibleto take advantage of the Rule 12g3-2(b) exemption immediately followingderegistration. To qualify for the Rule 12g3-2(b) exemption, a foreign private issuermust satisfy the following conditions:

Publish Material Disclosure Documents in English

The foreign private issuer must publish electronically, such as through a postingon its website, certain material non-U.S. disclosure on an ongoing basis in English. Inaddition to these ongoing publication obligations, a company that is seeking the12g3-2(b) exemption and which has not been subject to Exchange Act reportingobligations during its current fiscal year must publish all material non-U.S. disclosuredocuments it has released since the first day of its last fiscal year. The rule lists varioustypes of disclosures which would be considered material for purposes of theexemption, including information relating to:

• the company’s results of operations or financial condition;

• changes in its business;

• acquisitions or dispositions of assets;

• the issuance, redemption or acquisition of securities;

• changes in management or control;

• the granting of options or the payment of remuneration to directors orofficers; and

• transactions with directors, officers or principal security holders.

At a minimum, a foreign private issuer should publish English translations of thefollowing documents electronically:

• its annual report and annualfinancial statements;

• its interim reports that includefinancial statements;

• press releases; and

Practice Tip: A foreign private issuermay provide an English summaryinstead of a full English translation ifa summary would be permitted for adocument submitted under Form 6-Kor Exchange Act Rule 12b-12(d)(3).

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• all other communications and documents distributed directly to holders ofthe subject class of securities to which the exemption relates.

The electronic publication of material non-U.S. documents should be madepromptly after the information has been publicly disclosed in the foreign privateissuer’s primary trading market. Promptness depends on the type of document and thetime required to obtain a requisite English translation. In general, the company shouldpublish any material press releases on or around the same business day as the originalpublication.

Maintain Foreign Listing

The foreign private issuer must maintain a listing of the relevant securities on atleast one non-U.S. exchange that constitutes its primary trading market. A definition ofprimary trading market appears above under “Foreign Private Issuer Deregistration.”The foreign private issuer is not required to have maintained the listing for a givenperiod of time, so a company that has recently listed its securities on a foreign stockexchange is eligible to claim the exemption.

No Exchange Act Reporting Obligations

Lastly, in order to establish the Rule 12g3-2(b) exemption a foreign private issuermust not already be subject to reporting obligations under Sections 13(a) or 15(d) ofthe Exchange Act. A company will generally be able to meet this condition if itssecurities are not publicly offered or listed in the United States and it has not otherwiseregistered a class of its securities – including debt securities – under the Exchange Act.

A foreign private issuer that fails to comply with the provisions of Rule 12g3-2(b)must either re-establish compliance with the rule’s conditions in a reasonably promptmanner, determine that it has fewer than 300 U.S. resident security holders and iseligible for the exemption under Rule 12g3-2(a), or register the relevant class ofsecurities under the Exchange Act within 120 days of the company’s fiscal year end.

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RR DONNELLEY AT A GLANCE

More than 146 Years in operation

Nearly 9.85 billion 2009 net sales

Nearly 55,000 Employees

600+ Global locations

Nearly 160 Manufacturinglocations

240 2010 Fortune 500listing

800+ Issued and pendingpatents

Approximately$1.8 billion

Capital investmentover the past five years

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